Come to China
NVESTORS ARE still speculating about exactly what Didi Global, a ride-hailing giant, did to draw the ire of Chinese regulators. Some say it foolishly pushed forward with its $4.4bn initial public offering (IPO) in New York despite being told by officials to delay the listing. Others suggest it stole the thunder from leaders in Beijing by kicking off trading on June 30th, the eve of the 100th anniversary of China’s Communist Party.
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Whatever its sin, Didi now says it plans to delist from New York and relist in Hong Kong. It has not specified its reasoning or responded to queries on the move. It is possible that the company has been forced to leave America by Chinese internet regulators. This is a fiasco for the firm and its shareholders, such as SoftBank, a Japanese investment group (whose share price has sunk by 8% since the delisting announcement). It also portends two big changes in how foreign investors will access Chinese shares in the future.
The first is the end of Chinese IPOs in America. Not long ago American exchanges were the leading destination for ambitious Chinese firms. Alibaba, an e-commerce behemoth which went public in New York in 2014, remains the largest American IPO in history. Didi was part of a recent groundswell of Chinese darlings keen to tap America’s deep capital markets. Some 248 Chinese groups with a combined market capitalisation of $2.1trn were trading in New York in early October.
Those listings have already been threatened by American rules that require all listed firms to provide access to internal auditing documents or be booted off exchanges. Chinese companies cannot readily comply because officials in their home country consider such materials to be “state secrets”. The dilemma goes back a decade but a law put into practice by the Securities and Exchange Commission on December 2nd will purge all non-compliant companies from American bourses by 2024. That could have potentially painful consequences for some investors.
Many have held out hope of an eventual agreement between American and Chinese regulators that would revive a once-booming cross-border listing business. However, the suggestion that Chinese regulators are behind Didi’s delisting—an unprecedented intervention by a foreign government in the American market—makes a deal much more difficult to strike, says Jesse Fried of Harvard Law School.
A second shift is the redirection of capital flows towards Chinese markets. Didi has been one of many Chinese tech groups in recent months to be hit with harsh regulations. The campaign, which has been aimed almost exclusively at companies with overseas listings, has erased some $1.5trn in shareholder value since February. Yet at the same time Chinese securities markets have experienced a windfall. In particular, foreign holdings of Chinese stocks and bonds on the mainland have nearly doubled between the start of 2019 and September of this year, to about $1.1trn (see chart).
The reallocation is mainly the result of two forces. One is the inclusion of Chinese stocks and bonds in global indices, which has meant that index funds need to hold them. Another is the fact that mainland exchanges host few of the pummelled online groups, which mostly have American or Hong Kong listings. As a result, stocks listed in Shanghai and Shenzhen are less exposed to regulatory ire and more diversified, notes Alicia Garcia Herrero of Natixis, a bank. That makes them particularly attractive this year. As more Chinese companies follow Didi from America to Hong Kong, or move to the mainland, even more capital could flow into China.
Many foreign investors expect Chinese-listed firms to be more attuned to its rapidly changing regulatory environment, says Louis Luo of ABRDN, an asset manager. And despite their willingness to crush foreign-listed tech groups, the authorities are much more sensitive to domestic market turmoil given the high level of retail investment from ordinary households. It is hard to imagine regulators causing a locally listed group’s share price to collapse as Didi’s has. Rather, companies with regulatory challenges will henceforth need to sort them out before listing in China. Chinese authorities have long hoped that their corporate darlings would list closer to home. They are getting their wish.
This article appeared in the Business section of the print edition under the headline “The great reallocation”