By Claude Barfield
Several weeks ago, I noted that with all the talk of decoupling, Wall Street was busy forging stronger financial and investment bonds with Chinese companies and investors. It turns out both Wall Street and I underestimated Beijing’s determination to have its cake and eat it too — that is, continuing to entice Western financial firms to service Chinese mainland investors while embarking on a determined campaign to restrict data collection and movement as well as Chinese firms’ investment abroad (i.e., in Wall Street).
Two weeks ago, just days after the ride-hailing firm Didi Global had successfully pulled off a $4 billion initial public offering (IPO) on the New York Stock Exchange, the Cyberspace Administration of China (CAC) demanded the company pull all of its apps from app stores for having violated data security regulations. Subsequently, Didi stock promptly lost a fifth of its value. Then, in a move with potentially much broader implications, China’s State Council announced a sweeping crackdown on “illegal securities activities,” particularly with regard to offshore listings that would henceforth be subject to stricter regulations and a full security review by the CAC. Then, last week, underscoring the depths of Beijing’s concerns, the Ministry of State Security led a group of six other agencies in stationing staff in Didi’s offices.
Before commenting further, here is the economic universe we are discussing — the future of which is now highly uncertain. For the past decade, Chinese startups have flocked to US stock exchanges. There are now almost 250 Chinese firms listed in New York, with an estimated market capitalization value of some $2 trillion. Chinese companies have raised an estimated $75 billion from IPOs in the US since 2012, and this year alone some 36 Chinese companies have gone public in the US.
For Chinese tech companies, US financial markets offer both a greater depth of resources and a level of sophistication unmatched around the world — and more leeway on capital and data movement. For US investment bankers (viz., JPMorgan Chase, Goldman Sachs, and Morgan Stanley), fund managers, and individual investors, Chinese listings have led to huge IPO management profits and large capital gains as companies such as Alibaba and Tencent prospered greatly.
These potentially devastating changes are still being played out, but here are several early conclusions. First, security issues (particularly data security) have become inextricably linked with economic and commercial considerations. Thus, China’s lead agency for the unexpected new foreign listing rules is not the finance or trade ministry but the CAC — the aforementioned cyberspace regulator — which has often been at odds with economic regulators. Armed with new legislative powers it helped craft, the CAC is now the lead agency not only on information security, but more broadly on overseas foreign investment policy. (As one close observer noted: “The cybersecurity regulator has become the new securities regulator.”) “Wolf warrior” diplomacy seems to have come to Chinese investment policy as part of the larger crackdown on Chinese tech companies.
Second, Chinese entrepreneurs are already rethinking plans for US-listed IPOs, with Hong Kong and Shanghai as alternatives. Those who brave to disobey Chinese regulatory policy and list in the US will inevitably face a “Chinese penalty” of steeper IPO fees and fundraising difficulties.
Finally, on a separate decoupling track, the US is moving to force US-listed Chinese firms to adhere to the same standards it demands of other foreign corporations. For years, the US has acquiesced to Beijing’s edict that requiring such information constituted a national security threat. With new mandates from Congress, US regulators are moving to enforce US standards, a course that will lead to a game of chicken with almost $2 trillion of Chinese US listings at stake.
Breaking up still may be hard to do, but both China and the US seem ever more ready to test the guardrails.