To the world's investors, the saga over Didi Global has made China's biggest tech firms a riskier bet as President Xi Jinping seeks to control one of the country's most valuable resources: big data.
Didi is by most measures an appealing success story. The firm controls almost the entire ride-hailing market in China and counts SoftBank Group and Tencent as major shareholders.
Didi was actually profitable in the first quarter, a rarity for the industry. Its initial public offering (IPO) last week was the second-biggest in the US by a company based in China, and it was well received. Didi sold 317-million shares - about 10% more than originally planned.
And yet the listing on the eve of the Chinese Communist Party's centenary didn't appear to trigger celebration back in Beijing.
Beijing wants tech
— Xiaomeng Lu, Senior analyst at Eurasia Group
firms to keep their
core assets in China
Instead, two days after the IPO, China's cyberspace regulator said it was reviewing the company on national security grounds. Two days after that, the regulator said the firm had committed serious violations in the collection and use of personal information. It then ordered the company's app to be removed from stores.
What made Didi so valuable to investors is the same thing that makes it and other tech companies a potential threat to Beijing: it holds vast amounts of sensitive data from half-a-billion annual active users, mostly in China.
Over the past year Xi's government has sought to gain control of this data, both to protect users from abuse and find a way to use it to spur broad-based economic growth rather than simply enrich a cohort of billionaires that could potentially challenge the communist party's authority.
Didi, like many other Chinese tech giants, grew rapidly in the absence of comprehensive oversight. Beijing is now seeking to plug regulatory loopholes, but it needs more time.
By listing in the US, Didi effectively sidestepped an extensive approval process by China's securities watchdog at a time when officials have pushed for more firms to raise funds at home.
"Beijing is not pleased to see its national champions cosying up to foreign stakeholders," said Xiaomeng Lu, a senior analyst at Eurasia Group, a political risk consultancy.
"It also wants tech companies to keep their core assets - data and algorithms - in China."
Some projections show China will hold a third of the world's data by 2025, giving it potentially a massive competitive advantage in areas like artificial intelligence that will drive the modern economy.
And the geopolitical stakes are also high: the Biden administration in the US is
reviewing what user data should be off limits to China, and Beijing is similarly concerned about handing over information that could be used by its adversaries.
China's campaign to impose tougher controls on the nation's tech firms accelerated late last year as the country recovered from the impact of the Covid-19 pandemic and tensions with the US intensified.
Officials launched a powerful broadside on the fintech sector when they pulled Ant Group's $35bn (about R502bn) dual listing in Shanghai and Hong Kong at the eleventh hour. Like Didi, Ant dominated its field. In just a decade, the firm, an affiliate of Jack Ma's Alibaba Group, had grown to reshape the lives of millions of Chinese through its Alipay app as well as the giant Yu'ebao money-market fund.
By March it was clear authorities were widening the offensive. President Xi, at a meeting of the communist party's top financial advisory committee, warned that Beijing would go after so-called "platform" companies that have amassed data and market power.
This term effectively covers a range of firms that offer services to hundreds of millions, from Didi to food delivery giant Meituan and e-commerce leaders like JD.com.
The crackdown has weighed heavily on the tech sector.
The year in which China is projected to hold a third of
the world’s data
— 2025
Alibaba's Hong Kong-traded shares have lost 33% since their October high, while Tencent (which is China's leader in social media, games and music publishing) is down 28% since a record in January. Didi fell as much as 11% last Friday.
China isn't alone in trying to control the dominance of large technology firms.
The US Congress is seeking to force companies such as Amazon.com and Apple to radically change their business models, while Google faces a sweeping EU probe into its advertising technology.
"We have entered a new period globally where the regulatory scrutiny on tech has
increased and will be ongoing for some time," said Joshua Crabb, a senior portfolio manager at Robeco in Hong Kong.
But the scale and speed of Xi's campaign speaks to the Chinese Communist Party's obsession with control. The party is battling what it sees to be multiple threats to national security, and its five-year plan in October
included a focus on security issues for the first time. Rivalry with the US is only intensifying under the Biden administration, which recently rallied allies to present a more united front against Beijing.
The issue is that Chinese entrepreneurs often turn to US stock exchanges, which offer founders something they can't get at home. A deep pool of international capital and lower barriers to entry mean the world's largest market remains a key destination for Chinese and Hong Kong firms, which were fundraising at a record pace earlier in the year.
Potential forced delistings by the New York Stock Exchange and tougher requirements on the Nasdaq have been no deterrent to Chinese companies in need of cash.
Though the Chinese Communist Party has little say over the US listing process for its private companies, it can often nudge top-level management.
But exerting influence over a business's operations - like it did for Didi - is a far bolder move and puts the government's stamp on the US stock market.
China's cyberspace regulator "is trying to step in to exert their influence in this whole process", said Chucheng Feng, co-founder and partner of Plenum, a research firm specialising in China's politics and economy.
"They're trying to use Didi to set up this example of how a company will become listed in New York moving forward."
– Bloomberg News. For more articles like this please visit Bloomberg.com.
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