China to tighten rules for overseas-listed firms citing data protection after DiDi probe

Beijing said it would tighten rules for domestic firms seeking new listings abroad and strengthen oversight of overseas-listed companies, which can hinder attempts of Chinese firms to raise money in the U.S.

China’s State Council cabinet and the Communist Party’s General Office said it aims to crack down on illegal activity in the securities market, in a joint opinion released via state-run Xinhua News Agency, citing concerns about information security.

China will enact legislation “on data security, cross-border data flow, and other confidential information management,” they said.

The plan comes as Chinese regulators started cracking down on technology companies, including ride-hailing firm DiDi Global Inc, listed in the U.S. on Friday.

The guidelines were drafted for “profound changes in the economic and financial environment,” amid increasing disorder in the capital market that had made regulatory oversight tough, the authorities said.

The Cyberspace Administration of China (CAC) on Sunday said they are probing against the U.S.-listed Kanzhun Ltd and subsidiaries of Full Truck Alliance Co to “prevent national data security risks,” and also ordered smartphone app store operators in the country to remove DiDi’s app from the store, after the regulators found that the company had illegally collected users’ personal data.

DiDi, Full Truck Alliance, and Kanzhun raised close to $7 billion in total from U.S. initial public offerings in June.

Though there were no details of the proposal, the government’s stricter stance appears certain to influence Chinese firms weighing IPO overseas. Increased scrutiny of overseas listings could dampen the trend of companies tapping foreign markets for more significant fundraising potential.

Since 2012, Chinese companies have raised more than $75 billion from U.S. listings, according to Dealogic data.

As of May 5, there were 248 Chinese firms listed on U.S. exchanges, with a total market capitalization of $2.1 trillion, according to the US-China Economic and Security Review Commission.

In the year to date, around 36 Chinese companies have gone public in the U.S., the same number as the whole of 2020.

DiDi shares were sold at $14 each in the IPO, which was the largest debut of a Chinese firm in the U.S. since Alibaba raised $25 billion in 2014. The company had been valued at about $75 billion as of Friday.

Didi’s recent IPO raised $4.4 billion, was the largest since Alibaba Group Holding’s fetched $25 billion in the 2014 blockbuster stock sale.

China enacted regulations requiring companies listed outside the country to protect state secrets in 2009.

The U.S. Securities and Exchange Commission (SEC) has been planning to implement new listing rules after legislation was passed in May last year to ban Chinese firms from listing shares or raise money that refuses to let regulators inspect their audits for three years.

However, tensions between the world’s two largest economies have done little to deter Chinese companies from raising cash in American markets so far, welcomed by risk-hungry investors who have driven stock prices to historic highs.

The new measures could have far-reaching implications for Chinese tech giants planning offshore IPOs and the investment firms worldwide that hold stakes in them.

The scrutiny is mainly targeted at companies heading to the U.S. for listings, Bruce Pang, head of macro and strategy research at China Renaissance Securities, told The Wall Street Journal.

“Such actions create short-term disruption and pressure on market sentiment, not only on listed tech companies but also the valuation of pre-IPO companies,” he said.

The issue is that Chinese companies’ audit information “may involve the confidentiality of information and data in China,” Li Daxiao, chief economist at Yingda Securities, told WSJ.

The latest directives could fix a long-running regulatory loophole allowing Chinese tech companies to raise funds in overseas stock markets without much scrutiny at home.

Chinese tech firms typically register themselves in offshore tax havens such as the Cayman Islands to adopt a so-called variable interest entity structure that gives them the flexibility to raise funds offshore, as the region falls outside China’s legal jurisdiction.

Beijing has attempted to close the loophole by amending its securities law to provide a legal basis for enforcement actions involving overseas-listed Chinese firms; however, no action has been taken so far.

Last year, after Luckin Coffee Inc revealed an accounting fraud through inflated sales numbers, the Chinese Securities Regulatory Commission publicly criticized the company but didn’t impose any penalties.

Luckin is registered in the Cayman Islands and conducts most of its business in China. It was delisted from the Nasdaq Stock Market last summer, a little over a year after it went public.

Picture Credit: FX Empire