Even by Chinese stock market norms, the swings in Didi Global Inc. on Friday were exceptional.
In just a few hours, the ride-hailing company’s stock went from a 16 percent gain to a 12 percent loss, then surged back into positive territory before falling again. That was all before the bell rang in New York.
Didi had fallen 22% by the end of the day, triggering losses in US-traded Chinese stocks totaling more than $1 trillion since February.
Friday’s gut-wrenching ride, triggered by Didi’s announcement of plans to move its listing from New York to Hong Kong just five months after going public, demonstrates how risky betting on Chinese equities remains more than a year into Xi Jinping’s campaign to remake the country’s tech sector, as well as much else in Asia’s largest economy.
While the general contours of Xi’s ambition are clearer now than they were in November, the world is still in the dark about policy details that could be critical to the future of China’s largest listed firms. Knee-jerk optimism that Didi’s announcement would mark a turning point in the government’s crackdown faded swiftly, as the company’s 127-word statement left investors scratching their heads for answers on how the US delisting would play out.
The bigger question currently looming over Chinese stocks is how much pain Xi is ready to inflict on investors as he tightens his grip over China’s data-rich private sector and attempts to make the Chinese economy more egalitarian. Perhaps the one certainty is that the Communist Party’s interests will take a distant second place to those of shareholders.
Didi’s woes “remind us of the regulatory dangers in Chinese stocks,” said Jun Rong Yeap, a market strategist at IG Asia.
The selloff, which sent the Nasdaq Golden Dragon China Index down to its lowest level since 2008 on Friday and dragged the Hang Seng Tech Index to a new low in Hong Kong on Monday, has been especially painful for money managers and Wall Street analysts who have recently turned bullish on Chinese equities. HSBC Holdings Plc, Nomura Holdings Inc., and UBS Group AG all turned positive in October, citing factors like as low valuations and a waning fear of Beijing regulation. Big asset managers like BlackRock Inc. and Fidelity International made similar arguments.
According to people familiar with the subject, Didi’s delisting proposal was pushed by Beijing, which opposed the company’s New York IPO due to fears over sensitive data leaks to authorities in the United States, China’s key geopolitical competitor.
While Didi stated that existing investors would be able to convert their holdings into new publicly listed shares, the company provided little specifics on the mechanics of changing its listing and the potential repercussions for stockholders.
On Friday, a Didi spokesperson did not respond to a request for comment. The Chinese securities regulator said on Sunday that it respects companies’ decisions over where to list their stock. It described claims that regulators are ordering companies to cancel their US listings as “absolutely false.”
The tale follows a trend of regulatory surprises that began last November when Beijing canceled Jack Ma’s Ant Group Co.’s big IPO just days before it was scheduled to begin trading. Xi has made it plain that Communist Party priorities, like data security, tighter control over tech behemoths, and more fair income distribution under the “shared prosperity” framework, take precedence over how local and international investors are treated. Didi’s delisting implies that Xi is growing more confident that he can achieve his goals without the assistance of US financial markets.
Optimists contend that most of this has already been factored in. One illustration of how much valuations have fallen is Alibaba Group Holding Ltd.: The e-commerce behemoth is trading at an all-time low of 13 times analysts’ estimated earnings for the next 12 months, down from over 30 a year ago. According to Bloomberg statistics, the stock’s 20% valuation advantage above Facebook parent Meta Platforms Inc. has converted into a 34% discount.
According to Sam Le Cornu, co-founder, and chief executive officer of Stonehorn Global Partners, which has been adding to its Alibaba holdings, the fall has given purchasing opportunities for investors with longer time horizons. However, in an interview with Bloomberg Television on Friday, Le Cornu emphasized that the future of China’s tech industry is likely to be rough.
According to people familiar with the situation, Didi plans to file for a Hong Kong listing in March. The scope of the project is daunting: in addition to the technical logistics of calculating a fair price, management will have to deal with potential lawsuits.
Furthermore, there is no certainty that Hong Kong will approve the plan. Didi’s original motive for pursuing a U.S. listing was based in part on Hong Kong regulators’ desire that the company provides proof of its legality – a challenging task considering that many of the company’s drivers are still unlicensed.
More broadly, the regulatory risk for Chinese firms shows little sign of abating. Beijing is said to be drafting regulations that effectively prohibit companies from going public on foreign stock exchanges through variable interest entities, while the US government is pushing ahead with efforts to delist Chinese companies from American stock exchanges for failing to meet Washington’s disclosure requirements.
A final package of regulatory penalties against Didi, Ant Group’s restructuring, details of Xi’s master plan for tightening the government’s grip on big data, the results of a sweeping corruption probe into China’s finance industry, new regulations on Macau casinos, and the fate of over-indebted real estate developers like China Evergrande Group are all possible.
More: Where Might Xi Strike Next in China’s Regulatory Crackdown?
“Capital will only go where there is trust,” Le Cornu explained. “People aren’t going to buy these equities if you continue to cast a cloud of uncertainty over the regulatory environment.”