China has declared several economic wars in the last several weeks. First, Beijing targeted the commodities market, clamping down on higher prices for its most popular imports, such as soybeans, copper, aluminum, and corn. Next, central authorities spotlight the cryptocurrency realm by banning bitcoin mining and restricting trading. Its latest battle is on Big Tech as officials are perturbed by the flood of technology firms filing initial public offerings (IPOs) in the United States market. As the world’s second-largest economy applies pressure on publicly traded tech firms, this is driving a stake into the heart of financial markets and investor sentiment. Case in point: the week-long rise and fall of Chinese-based ride-hailing app and Uber competitor Didi Global.
Didi in Deep Doo-Doo
It took only a week for Didi to see its shares tank after joining the tidal wave of IPOs on June 30. Shares cratered more than 19% during the July 6 trading session, falling to as low as $11.58. Didi ended the day at $12.49, and it continued bleeding in after-hours trading by sliding another 1.3%. The hemorrhaging extended into the next session, tumbling 4%. Now the company is trading below its IPO price of $14.
Traders simultaneously headed out the door at the opening bell after the Chinese government announced ahead of the Fourth of July long weekend that Didi would be required to stop new user registrations so regulators could perform an in-depth cybersecurity review of the popular Chuxing app. The nation's Cyberspace Administrator quickly pulled the app from stores in China, arguing that the application "severely violated laws by illegally collecting and using personal information." It was later removed from WeChat and Alipay apps for new users
According to a bombshell report from The Wall Street Journal, Chinese officials warned Didi to suspend its U.S. IPO amid cybersecurity concerns. Didi executives rejected the recommendation and pulled the trigger anyway and enjoyed the largest U.S. IPO for a Chinese business since Alibaba in 2014. Why Beijing did not intervene is unclear, especially since authorities halted Ant Group's enormous IPO in December 2020. The company warned in its prospectus that it could face punishment from dissatisfied regulators:
“We cannot assure you that the regulatory authorities will be satisfied with our self-inspection results or that we will not be subject to any penalty with respect to any violations of anti-monopoly, anti-unfair competition, pricing, advertisement, privacy protection, food safety, product quality, tax and other related laws and regulations. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the general public going forward.”
That said, it was not only Didi that tanked. Alibaba, Baidu, JD, and a panoply of other Chinese securities were bleeding red ink.
It is unknown what Beijing will demand from Didi before it is permitted to sign up new users again. Whatever the case may be, this might be a chance for the Robinhooders and Wall Street Bets to buy the dip perhaps and drive up the price as they have done for other beaten-down securities over the last 12 months. But not everyone believes this is an excellent opportunity to acquire a percentage in the company – or any other Chinese firm for that matter.
Has Winter Arrived for Chinese Stocks?
Will foreign investors shy away from any future stocks emanating from one of the world’s largest markets? Or, desperate for growth and yield, will traders – armchair and institutional – give Chinese securities a second chance? Some assert that the confusion and calamity could substantially erode global investors’ confidence in Chinese stocks for a long time.
Sharif Farha, a Dubai-based portfolio manager at Safehouse Global Consumer Fund, told Bloomberg that several hedge funds will likely exit their positions after China “allowed global investors to take pain, and consequently have broken trust with a lot of foreign investors.” CNBC's Jim Cramer thinks investors should refrain from ever buying a Chinese IPO again, noting that “you’re a moron if you buy a Chinese deal after this,” even if it pops in the coming sessions. Ipek Ozkardeskaya, a senior analyst at Swissquote Group Holdings SA, described it as “very bad news for these Chinese companies’ image abroad.”
Catching a Cold From China
Investors will be monitoring additional probes of other tech businesses that have recently gone public, including Kanzhun Ltd., the owner of an online recruitment platform, and Full Truck Alliance Co., an Uber-like trucking startup. Traders' faith in Chinese businesses will be tested with on-demand logistics and delivery firm Lalamove as it confidentially filed an IPO and is attempting to raise $1 billion. China's influence on Wall Street is so enormous that the New York Stock Exchange contracts influenza if it sneezes. The big trouble in little China has rippling effects, but will traders pay the Faustian bargain for a chance at the next big thing in tech?
~
Read more from Andrew Moran.
