China’s regulatory crackdowns on technology companies have caused uncertainty for the sector, as well as investors. There are a number of factors at play, all of which highlight different schools of thought in China about the way forward for companies wanting to raise capital overseas.
China’s regulatory action against a number of technology companies has cast a cloud of uncertainty over the sector, and each individually can be viewed as a microcosm of broader concerns in China. They also shine a light on a debate in China about whether Chinese companies’ expansion should ultimately be encouraged or restricted.
A series of events have been painted broadly as the ‘tech crackdown’ in China. The most visible began in October 2020 with Jack Ma, the Co-Founder of Alibaba Group, being publicly critical of China’s regulators. He was then summoned to a meeting and soon disappeared from public view. The next month, the initial public offering (IPO) of Ant Group – the financial affiliate of Alibaba – was suspended. Then there was the June 2021 listing of ride-hailing app Didi Chuxing in New York, which was greeted with enthusiasm by investors. But just days later, cybersecurity regulators in China took action against the company, causing its share value to plummet, and prompting the company to prepare a delisting from the United States.
This also comes against the backdrop of a long-running accounting dispute about US auditors gaining access to the working papers of Chinese companies that are listed on US exchanges. And on a domestic level in China, there has also been a focus on ‘common prosperity’ and addressing the wealth gap in China. This has all created uncertainty for Chinese technology companies, and in March internet analysts at J.P. Morgan China described the sector as “uninvestable” for the next six to 12 months.
There has been a “regulatory whirlwind”, comments Kendra Schaefer, Partner – Tech at Policy Research company Trivium China. She adds that it has caused great uncertainty: “It has given investors whiplash, and no one knows which way to jump,” says Schaefer.
Schaefer explains that a number of things have been happening in parallel. “Five or six regulators at the same time were pursuing their own agendas – they got a tacit green light from Beijing to rein in abuses of power by tech companies. They went after them at the same time for different reasons,” she says.
This includes the State Administration for Market Regulation taking action against e-commerce platforms Alibaba and Meituan for anti-competitive practices. There has also been a crackdown on the online education sector. And there have been data and privacy issues at play, which came to a head just after Didi listed in the United States.
The Cyberspace Administration of China (CAC) wanted Didi to undergo a cybersecurity assessment before its overseas listing, and Schaefer points to reports that Didi was advised to hold off on its IPO. It is possible, she notes, that because the CAC has not previously been involved in listings, Didi may have interpreted this as a suggestion – rather than an order – because it had not previously been in their purview.
Nan Li, Associate Professor in the Department of Finance at Antai College of Economics and Management, Shanghai Jiao Tong University, notes that companies like Didi have been collecting vast amounts of data. “They are collecting data on where people are going and some of the locations are actually sensitive,” says Li. This data includes maps and locations that could be issues of national security, and there are concerns about who will be able to access this data if the tech companies expand overseas. “There is some data that is necessary for them to keep and to use, but [the regulators] are still revising how to regulate the data usage for those platforms,” says Li.
Also, notes Professor Li, there are issues about how data is used by any platform company – especially if it is being used for financial services – and the potential for misuse and information asymmetry between the tech giant and the user. She adds that these are not issues that are unique to China – all countries are considering how such companies and their handling of data should be regulated.
Regulation has been an issue with large tech companies, particularly those involved in financial services. While the suspension of Ant Group’s IPO is often viewed as punishment for Jack Ma’s outspoken comments, there are justifiable reasons for the regulator to take action against platform companies like Ant Group and Tencent. Li tells Treasury Today Asia, “They all need better market regulation and appropriate regulation of how they should do financial services on the platform. This is very important – it is necessary regulation of fintech companies and why it was correct to stop the IPO [of Ant Group],” says Li. Ant Group, she comments is “a financial institution under the cloak of a technology company.” She has previously written for SupChina that Ant was involved in deceptive branding, conflicts of interest and predatory lending behaviour that made it necessary for the state to intervene. In this context, the crackdown is not only understandable, but also necessary in order to develop a healthy platform economy and financial system, she argues.
Another major issue that affects overseas listings is the introduction of the US Holding Foreign Companies Accountable Act, which was passed in 2020, and stipulates that foreign companies that are listed on US exchanges must make their audit papers available for inspection. If they don’t, they face delisting, and the US Securities and Exchange Commission has already publicly mentioned which Chinese stocks are at risk. “The clock is ticking,” says Schaefer for those companies. In the past, this audit paper spat may have been viewed as an “ineffectual stand-off”, but now things are really happening because of that act, says Schaefer. “The real thing to watch is whether or not China ultimately decides to open its books up,” she adds. There have been reports and rumours that progress is being made on the working papers issue, but this still needs to play out.
These are just some of the issues that affect the technology companies that are listed overseas. “There are many streams running in parallel,” says Andrew Collier, Founder and Managing Director of Orient Capital Research. He is also the author of China’s Technology War: Why Beijing Took Down its Tech Giants and describes some of the overarching themes. One is the regulatory catchup that Beijing has had to do in regulating its tech companies. And another major theme, says Collier, is ‘common prosperity’.
Common prosperity is not a new term, but there has been an increase in its usage which has been more noticeable since the tech crackdown. President Xi Jinping officially spelled out his vision for it in 2021, and Collier explains that this provides the context for understanding Xi’s view of how the Chinese state should progress.
Common prosperity is about equality and addressing the wealth gap, and the technology giants are part of it because they are viewed as having amassed too much money and power. One view is that China is returning to the days of the Cultural Revolution and will grab the wealth of the rich; that Alibaba’s Jack Ma got too big for his boots and needed to be brought in line. That, says Professor Li, is a misunderstanding and will not happen. The regulation of the sector and common prosperity, she says, does not mean the state views the technology companies and their founders as having too much money. “The view that this is like the old days of grabbing the wealth of the rich people and distributing it – this is a common misconception. It is a misalignment of all the information,” says Professor Li. She argues that each of the issues affecting the technology companies – the various types of regulatory action – should be viewed independently and not conflated with each other.
Li describes common prosperity as the goal of creating an environment where hard work is rewarded, and also encouraging micro loans and credit to entrepreneurs to enable them to start their own businesses. Introducing these reforms is not an easy job, says Li. Since the 1970s, she notes, China has been transforming itself from a planned economy to a market-based economy. “It’s not an easy job for China; it’s not easy for any country,” she says. “I still feel confident about the outlook of China. We are definitely not going back to the Cultural Revolution period. Outsiders think they are going to grab and remove the wealth of the rich,” says Li. “That is not going to happen,” she says.
In addressing all this for the tech sector, there is a big internal debate going on in China right now, says Schaefer. She describes the two camps as the ‘doves’ and the ‘hawks’. The working paper issue highlights it: the first group is the economists who want foreign trade and want to reach a compromise so that companies can pursue overseas listings. And then there is the other group – the hawks – who see this as a national security issue, that you cannot show these working papers because they contain sensitive data.
This ties in with what Collier says about there being two schools of thought in China at the moment. “The Chinese leadership is torn between those who want to encourage more foreign capital and reform of the financial system, and then those who are concerned about raising capital outside of China,” says Collier.
There is one view that foreign capital is helpful and China needs to be modernised further, says Collier. Then there is the other view that overseas listings would allow the United States access to troves of data – whether that is in the form of data on the journeys of Didi, or the contents of the audit papers.
These issues affect a large number of stocks. “There is a lot of uncertainty,” says Collier, and ultimately many companies may have to delist from exchanges abroad. Hong Kong could potentially be the listing location of choice for those companies that are more sensitive and are facing data restrictions, says Collier.
Schaefer agrees and says, “Some Chinese companies are already starting to think about pursuing a secondary listing in Hong Kong” so they can fall back on that if the worst comes to the worst. Hong Kong is attractive, says Schaefer, for such companies. And for the data heavy companies, Hong Kong may not be considered ‘abroad’ and so they may not need the cybersecurity review that the regulator is insisting on for overseas listings. Does Hong Kong count as abroad for Chinese companies? This is where things get fuzzy, and despite the issuance of some guidelines, Schaefer says this has muddied the waters further. Ultimately, if the regulator decides the company needs one, they have to have one.
While these issues play out, it boils down to two approaches: those who want to make things easier for technology companies and help them go abroad and raise capital, and those who remain concerned about data security and national security issues. Until it is clear which side of the debate the technology companies’ fate will land on, uncertainty will remain for the companies – and investors.
