Diving into Didi’s Aftermaths: On Data and Capital
The Chinese government's reaction to Didi’s overseas IPO was not an isolated incident - it is looking to install tighter control over data and capital. But it would be short-sighted to believe that this is only relevant for big tech companies such as Alibaba and, most recently, Didi. Charles Mok analyses the aftermath of Didi’s IPO and what this means in the greater scheme of things.
Since the Chinese government initiated its investigations and imposed sanctions against Didi Chuxing on July 2, two days after Didi Global’s initial public offering (IPO) on the New York Stock Exchange on June 30, there has been widespread external public consensus that the Chinese official actions implied stronger regulatory strangleholds on China’s Internet “big techs,” as well as deterrence against further foreign IPOs. The timing of Didi’s IPO and the government’s reaction — one day before and after Beijing’s grand celebration of the 100th anniversary of the Chinese Communist Party — has also invited inevitable speculation about its political inference.
What is obvious is, that this is not an isolated incident. A flurry of escalated regulatory actions has since followed. Several Internet companies, including Didi Chuxing, Tencent and Alibaba, were fined by the State Administration of Market Regulation (SAMR), China’s chief antitrust regulator, for failing to report earlier merger and acquisition deals for approval. Likewise, Tencent's earlier proposal to "streamline its stakes" to reach a merger with Huya and Douya, China's top two streaming sites for video games, was blocked by the SMAR, which cited the firm's failure to come up with sufficient remedies on relinquishing certain exclusive rights.
Several pending U.S. IPOs have also been suspended, including LinkDoc (a medical data group backed by Alibaba), Keep (a health app) and Ximalaya (a video blogger platform). Even some companies in their earlier stages of considering an IPO overseas, U.S. or otherwise, have shelved the idea for now, such as Bytedance, holding company of video platforms Tiktok and its domestic version Douyin.
The questions that follow are obvious. The initial justifications of protecting cybersecurity and personal information of China’s citizens, taken in light of the Chinese rulers’ dominating thoughts on national security, may be understandable. But what will the implications be, domestically and globally, and ultimately, how should businesses and governments internationally see this “new normal?”
Unsurprisingly, commentators in China have jumped at the opportunity to support the government actions. Some of their reasonings are worth noting, in order to grasp the official logic used. Global Times, the English-language government mouthpiece, made it clear in an editorial on July 5 that "protecting users’ personal information" was a national security issue, and wrote, "An internet giant absolutely cannot have a better command than the state of the super-database that is Chinese people's personal data."
A widely circulated analysis in China, purportedly written by a former central government propaganda official who is now in the Internet industry, also pointed out three key observations from the Didi incident. First, Didi ignored warnings from relevant government agencies. Second, the incident has damaged public trust in these related government regulators, and this will in turn expedite reforms in regulations on data classification and security, as well as critical infrastructure information security. Finally, antitrust actions will continue with further emphases in data governance and also against "unrestricted capital market expansion.”
Continuing enforcements and changes – and no agency wants to be seen as sitting by idly
Indeed, some officials reportedly have in private described Didi as “yang feng yin wei,” that is, to comply publicly, but defy privately, and in the process cast several regulatory agencies in bad light, including the Cyberspace Administration of China (CAC) and the State Administration for Market Regulation (SAMR). While what really transpired before Didi's IPO between it and the regulator may be a bygone matter by now, the stepping up of regulatory actions after the crackdown has been evident. It is not inconceivable that agencies are now eager to show that they really “mean business,” not only to the tech giants, but, possibly more importantly, to the highest level of the Chinese central government.
Most notably, the CAC initiated on July 10 a solicitation for public feedback to a proposed change in the oversight process for technology platform companies seeking foreign listings. If such companies are in the possession of the personal data of more than 1 million users - a low threshold for a country with close to 1 billion active Internet users -, government pre-approval for such IPOs will be necessary. The public feedback collection period will end on July 25, meaning a quick implementation of the draft proposal will be imminent.
Other agencies are not about to be seen as sitting by idly. In fact, seven agencies, including SAMR and CAC and also the Ministries of Public Security, State Security, Transport and Natural Resources, and the State Administration of Taxation, will work together to conduct on-site inspections of Didi Chuxing, guaranteeing non-stop troubles on all fronts for the company for a long time to come. Separately, even the People's Bank of China (PBOC) made sure they are not to be left out, by sounding a warning that "monopolistic behaviours does not only exist in the Ant Group but also in other institutions," citing also "excessive capital expansions" as a key problem area. No one can afford to be missing in action in the frenzied series of actions to follow.
Naturally, these actions are only in accordance with the directives jointly issued by the General Office of the Chinese Communist Party and the General Office of the State Council on July 6, entitled "opinions relating to tackling illegal securities activities according to law." The fact that practically the two highest apparatus of the Party and the Administration have come together to issue such an urgent directives is rate, and this is a clear indication of how deeply concerned and even worried the central leadership must be, and that they consider big tech and capital market control to be posing a serious threat to their authority.
What these directives cover is wide-ranging and not exclusive to the big tech sector. Possibly due to the public focus on Didi, many may have overlooked the implications on the capital market in general, covering all forms of fund-raising for firms from private equity to public listing. Besides the concerns over foreign IPOs, it is quite obvious that these actions have a lot to do with the government’s immense worry for an overheating of the market and a re-occurrence of China’s stock market crash of 2015, which must have made lasting and haunting memory for Xi Jinping’s government, back from the early years of his leadership.
What these directives cover is wide-ranging and not exclusive to the big tech sector... Many may have overlooked the implications on the capital market in general, covering all forms of fund-raising for firms from private equity to public listing.
On data – more control no matter the cost
A deeper dive into the directives may also reveal future ripples to players from other sectors. Under its Section 5 Article 20, the directives stressed the need to improve regulations over “China concept stocks.” However, it is not clear what the term may cover, and while Chinese companies seeking listing overseas may still conduct most of its business within China, such as for most tech platforms, it may not be so for companies from other sectors, such as electronics or manufacturing. Even for tech platforms such as Didi, even though their current overall revenues from overseas markets may be minor, it is definitely still considered an important part for their future growth. So, how will these regulations affect companies from all sectors, and will they be forced to curtail their global ambitions because of domestic compliance requirements, and hence limit their global competitiveness? These may turn out to be costs to pay for China’s economy in future, in exchange for more complete control by the authority over its thriving private enterprises.
Nonetheless, China’s leadership seems willing to pay the price for attaining total control of not just these companies, but ultimately all the data. People often say, “data is the new oil.” But other than saying that both resources are precious and valuable resources, the similarity of the two stops there. While fossil fuel has a dwindling supply from a relatively static reserve at any point in time on our earth, data is being generated and amassed at great speed by people, companies, nations and their actions and transactions, all the time. The exploration and understanding for the strategic value of data has only just begun, and the Chinese government is obviously taking this very, very seriously, whether or not such approach with heavy-handed control is going to be the right tactic or not.
China’s new data security law – 2021 Edition
In June, China's National People's Congress, its highest lawmaking body, passed a new Data Security Law which, again, enhanced government authority to impose heavy fines for companies that export or hand over "important" data to foreign judiciary or law enforcement agencies without prior Chinese government approval. However, the law leads to the important question of how data can be classified, based on, as Chinese authorities have been trying to define, its "importance to economic and social development," as well as "the levels of damage to national security, public interests, the legitimate rights and interests of individuals and organisations.” It is simply too vague and subjective.
Defenders of China's latest legal moves will of course point out that, for instance, its Data Security Law is merely lifting a page from the U.S.'s CLOUD Act (Clarifying Lawful Overseas Use of Data Act), which enables US law enforcement agencies to demand access to online information from U.S. firms, no matter what country the data is stored in. Even the draft rule from CAC requiring companies holding more than 1 million users' personal information to acquire pre-approval from government before IPO can be compared with the U.S.'s FIRRMA Act (Foreign Investment Risk Review Modernization Act), which requires approvals by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee led by the Treasury Department, for investment transactions that involve personal data of 1 million or more Americans.
However, without a clear set of definitions, any due processes or oversight from sources independent from the government, the interpretation will inevitably be dictated by the authorities alone, and any protection for the interests of private enterprises or individuals can only be left at the authorities’ mercy.
It should be noted that Wu Zhenguo, SAMR's antitrust chief, has been quoted in an interview with "The Antitrust Source" of the American Bar Association that China's antitrust laws has never been used as, and will not become "geopolitical tools." While his comments were made about the antitrust law, one can expect that he or other regulators would say the same about the Data Security Law, or any other Chinese laws. However, in today's atmosphere of heightened tensions between China and the U.S., and even other European countries and other U.S. allies, one can hardly find comfort in such verbal reassurance.
Tighter control of capital is the goal - the “good old days” will not come back
As previously referenced, China’s actions are also about reining in "unrestricted capital market expansion.” The considerations over capital are very different from the considerations on data. After all, unlike data where China does not want to see its own going out, attracting foreign capital investment has been a hallmark of its economic success over more than the last four decades. Imposing stricter regulations on the capital market most likely results in deterring foreign and even domestic investment, even though targeting the ultra-rich class of individuals and private corporations to bring them under tighter “control” is also another policy goal.
Yet, this will remain an area of delicate balance that will be difficult, if not impossible, to maintain. China’s best hope, first, will be on the allure of its huge market that some investors find impossible to resist. Some investment analysts, while acknowledging that “the regulatory strong hand has deterred investors from investing in Chinese stocks”, are also expecting that “the regulatory pressures will ease,” with an extremely optimistic timeframe of the last quarter of 2021 or the first half of 2022.
Such views must have been guided by their own wish to “go back to the good old days” to turn quick profits from this huge market, but political realities make it obvious that the direction and force of the regulation will not change or reduce for a long, long time to come. Even if we ask the Chinese authorities, they will probably not lie about this, as far as foreign IPOs are concerned. But, many investors are still in denial.
China, of course, does offer an alternative to the current impasse — Hong Kong. Fraser Howie, market analyst and author, has said, "China has long desired self-sufficiency in a host of industries and it would be reasonable to think capital markets is part of the process." As a result, it is natural and obvious that in due course, Chinese companies will be steered to even more listing "domestically" in Hong Kong, and foreign investors will continue to utilize the link between the Hong Kong, Shanghai and Shenzhen exchanges to buy billions of dollars worth of mainland Chinese equities. In short, Chinese companies may enjoy the investments from U.S. investors, with "freedom" from foreign governments' "interference."
That's why we may end up with a situation where Chinese companies will no longer seek IPOs in the U.S., but U.S. holdings of Chinese securities may not decrease significantly. It remains to be seen whether U.S. authorities are overlooking this “loophole," or if they are allowing it on purpose with its own "strategic objective,” which many of us find hard to understand, or if they are still scrambling for counter measures. In the meantime, this may turn out to be another strategic advantage held by China in the post-globalization world, by having the cake and eat it too, if the west passively thinks this is just an internal matter for China and its own firms. It’s still your money.
Charles Mok is currently the Director of Tech for Good Asia. He was an Internet entrepreneur and before becoming a legislator representing Information Technology sector in Hong Kong's Legislative Council from 2012 to 2020.