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DIDI Delisting Is A Worrying Sign For Investors Holding Chinese Stocks

DIDI Delisting Is A Worrying Sign For Investors Holding Chinese Stocks

The current year has seen a massive wave of regulatory pressure by the Chinese government on key strategic sectors of its economy. Beijing has tightened regulatory scrutiny on its roaring tech, gaming and energy sectors, ramping up pressure on tech titans such as Alibaba Inc. (NYSE:BABA) and Tencent Holdings (OTCPK:TCEHY).

The sector has been hit with a massive regulatory storm ever since Alibaba Group founder Jack Ma criticized his country's government last year for what he called excessive regulations. Beijing hit back by cancelling the much-anticipated IPO of Ma's Ant Group--the world’s largest fintech--before putting the company through a "rectification" process and announcing it would henceforth "prevent the disorderly expansion of capital.

The wave of crackdowns has, in a matter of months, knocked off tens of billions of dollars from China’s pivotal tech sector, with the country’s biggest and most valuable public company, Tencent Holdings Ltd. losing its place among the world’s 10 largest companies by market value.

And now, yet another Chinese icon has succumbed to pressure from Beijing: ride-hailing giant DiDi Global Inc. (NYSE:DIDI).

DiDi has announced plans to delist from the New York Stock Exchange to pursue a listing of its class A ordinary shares on the Main Board of the Hong Kong Stock Exchange. This comes just months after the company’s disastrous IPO in June.

"After a careful study, the company will start delisting on the New York Stock Exchange immediately, and start preparations for listing in Hong Kong," the Chinese ride-hailing firm wrote Friday on its Weibo account.

DiDi’s terse, one-sentence announcement offered no explanation for the delisting, but came shortly after Chinese regulators asked top executives at DiDi Global to devise a plan to delist from U.S. stock exchanges. Recently, the Cyberspace Administration of China directed DiDi to work out precise details of taking the company off the New York Stock Exchange because of concerns about leakage of sensitive data, according to the report. Proposals under consideration include a straight privatization or a share float in Hong Kong followed by a delisting from the U.S.

DIDI shares have crashed nearly 25% after the announcement, taking with them e-commerce giant Alibaba Group (NYSE:BABA) which is down 16% as well as the entire tech sector, with KraneShares CSI China Internet ETF (NYSEARCA:KWEB) plunging 12.5%.

But DiDi should have seen this coming after the company chose to go against Beijing’s wishes by listing in the U.S.

Security Fears

Chinese regulators have all along been opposed to DiDi's U.S. listing as they fear it could expose Didi’s vast troves of data to foreign powers. DiDi pressed ahead with the June IPO anyway, in a move that Beijing construed as a direct challenge to its authority. Days after the listing, Beijing announced a cybersecurity probe into the firm and forced its services off domestic app stores. 

Yet, Didi’s exit from the U.S. is unlikely to be the last.

According to a  Bloomberg report, Beijing is planning to block Chinese companies from going public overseas through variable interest entities or VIEs. These are basically offshore holding companies that Chinese firms typically set up in places like the Cayman Islands to facilitate overseas listings. The ban has been included in changes in a new draft of China's overseas listing rules that may be finalized this month. Companies currently listed in the U.S. that use VIEs will also be required to make adjustments to their ownership structure. However, companies that are using the VIE structure can still go public in Hong Kong.

Back in July, Reuters reported that Chinese regulators were focusing on the VIE structure for overseas listings and how to better regulate them. The focus on the VIE structure comes as China attempts to reassert control over its popular Big Techs and tries to gain better control over data security.

However, the China Securities Regulatory Commission has denied the report about an overseas ban on VIEs.

Over the past few months, sweeping crackdowns across diverse sectors of the Chinese economy have been sending shockwaves across global financial markets, with American investors finding themselves in the firing line of some of the hottest sectors.

First off, Beijing cracked down on the crypto space, curbing bitcoin mining due to concerns of excess speculation and warning financial institutions against offering crypto services. 

Regulators then turned their sights on Chinese ride-hailing giant Didi Global Inc. for alleged data security violations before China's antitrust administrator ordered Tencent Music Entertainment (NYSE:TME)) to give its exclusive music licensing rights for online music.

Lately, Beijing has cracked the whip over China’s expansive online gaming sector, with Tencent Holdings and  XD Inc. (OTCPK:XDNCF) among the targets after a publication controlled by the Chinese government described online games as “spiritual opium” and ‘‘electronic drugs'’according to multiple reports.

Three months ago, China's Economic Information Daily published an editorial that compared video games to spiritual opium. Beijing followed through shortly thereafter with sweeping video game restrictions, with the rules published by the National Press and Publication Administration stipulating that users under the age of 18 will only be able to play games from 8 p.m. to 9 p.m. local time on Fridays, weekends and holidays.

Gaming addiction has affected studies and normal life…and many parents have become miserable,” the National Press and Publication Administration said in a statement.

China's new playtime rules are now considered among the world’s most restrictive gaming policies for children. Predictably, the restrictions have dealt a heavy blow to Chinese gaming stocks with shares of Tencent (OTCPK:TCEHY), NetEase (NASDAQ:NTES) and Bilibili (NASDAQ:BILI) among the worst hit.

Even China’s pivotal energy sector has not been spared.

In a dramatic reversal of fortunes, in June, Beijing announced huge cutbacks in import quotas for the country’s private oil refiners. According to Reuters, China’s independent  refiners were awarded a combined 35.24 million tons in crude oil import quotas in the second batch of quotas this year, a 35% reduction from 53.88 million tons for a similar tranche a year ago.

The big reduction came as part of government crackdown on private Chinese refiners known as teapots who have become increasingly dominant over the past five years. The move is intended to allow Beijing to more precisely regulate the flow of foreign oil as it doubles down on malpractices such as tax evasion, fuel smuggling and violations of environmental and emissions rules by independent refiners.

The crackdown is also intended to claw back control of China’s crude refining sector from private refiners to state owned refineries. And it’s reminiscent of its earlier crackdown on big tech operations that were getting dangerously powerful and seen to be threatening party politics. 

China’s Clean Energy Sector Booming

It's a different story altogether at China’s burgeoning clean energy sector. 

Shares in Chinese clean energy companies have been rallying hard as investors rotate into clean energy betting that Beijing will continue supporting the fast-growing sector as it continues giving the cold shoulder to Big Tech.

After choppy trading in the first few months of the year,China’s CSI New Energy Index has soared 50% in the year-do-date.

In sharp contrast, KraneShares CSI China Internet ETF (NYSEARCA:KWEB) has plunged 48% YTD. KWEB invests in stocks of Chinese companies operating across information technology, software and services and IT services, with Tencent, Alibaba and JD.com Inc. (NASDAQ:JD) it’s three biggest holdings.

China funds that focus heavily on green energy themes have easily outperformed other Chinese broad-based strategies in the first half of the year, with Kai-Kong Chay, senior portfolio manager for Greater China Equities at Manulife in Hong Kong, telling the Financial Times that his firm is most bullish on the renewable energy sector, especially companies in the supply chain of solar energy.

By Michael Kern for Safehaven.com

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