SinoInsight 1
Chinese ride hailing company Didi Chuxing (Didi Global; henceforth referred to as Didi) made headlines after it was targeted by the PRC authorities following a recent IPO in the United States. We highlight some key developments in the Didi saga below.
June 30
Didi went public on the New York Stock Exchange and raised $4.4 billion. According to news reports, Didi’s market value reached $68.1 billion on June 30, and grew to $78.63 billion the next day.
While the listing was the biggest U.S. share sale by a Chinese company since Alibaba in 2014, it was carried out in a low-key manner. Didi issued no official press release announcing the IPO, and Didi executives did not ring the NYSE opening bell on the day of its listing, unlike Jack Ma.
July 2
The Cyber Security Review Office of the Cyberspace Administration of China (CAC) announced that it would review Didi’s network security per the “Network Security Review Measures” (網絡安全審查辦法). Didi also had to stop registering new users during the review period.
Didi is the first Chinese company subject to a network security review since the Network Security Review Measures” was jointly rolled out by 12 PRC agencies—including the CAC, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Finance, and the People’s Bank of China—on June 1, 2020.
July 4
1. The CAC issued a notice in the evening stating that Didi had “seriously violated laws and regulations” in collecting and using personal information. Didi’s app was then removed from major app stores.
2. Duowei News, a Beijing-based overseas Chinese-language media outlet, cited a source close to PRC financial regulators as saying that Didi’s app was taken down from app stores due to “high-level concerns about data security risks to the country and Chinese citizens.” The source added that Didi repeatedly ignored attempts by regulators to communicate, but instead “moved first, requested permission later” (先斬後奏) by listing on the NYSE just before the CCP centennial on July 1, an act that greatly incensed regulators. The source also noted that Didi’s punishment would be far worse than Alibaba’s.
Duowei wrote that the PRC authorities have been reluctant to allow Chinese internet companies with large amounts of data (JD.com, Meituan, Didi, Alibaba, etc.) to list on foreign markets since 2018. Duowei added that PRC financial regulators have issued many rounds of guidance to Chinese companies who have already listed in the U.S. or are planning to go public there to instead have their IPOs in Hong Kong or on the mainland.
July 5
1. Beijing’s clampdown on Didi saw Chinese tech stocks in Hong Kong fall. Tencent, Didi’s third-largest shareholder, saw its shares drop 4 percent. Meanwhile, Kuaishou slid by over 6 percent; Meituan was down nearly 6 percent; and Lenovo fell 4 percent. Foreign investors like Credit Suisse, Merrill Lynch, and JPMorgan Chase sold over 1 million units of Meituan shares, while Goldman Sachs, Credit Suisse, Morgan Stanley, and other foreign investors sold 700,000 units of Tencent shares.
Before its IPO, Didi had received over $20 billion from 21 rounds of financing. Investors included well-known companies like Apple, Toyota, Tencent, Alibaba, and Foxconn, as well as prominent venture capital firms like Softbank, Hillhouse Capital, and Sequoia Capital. Didi’s top three shareholders are Softbank (21.5 percent), Uber (12.8 percent), and Tencent (6.8 percent).
2. According to The Wall Street Journal, the CAC “remained wary” that Didi’s “troves of data” could potentially fall into “foreign hands as a result of greater public disclosure associated with a U.S. listing.”
The Journal also cited “people familiar with the discussions” as saying that Didi “received mixed signals from different agencies,” with some financial regulators publicly expressing support for its overseas listing, while also “stressing the imperative of protecting sensitive data and networks.” A person close to Didi told the Journal that the company “ultimately decided to go ahead with the IPO as it faced increasing investor pressure for a big payout.”
3. The CAC’s Cyber Security Review Office announced a review of U.S. listed freight dispatch platforms “Yunmanman” (運滿滿) and “Huochebang” (貨車幫), as well as the online job recruitment platform “BOSS Direct Employment.” “BOSS Direct Employment went public on NASDAQ on June 11, and Manbang Group (parent company of “Yunmanman” and Huochebang” was listed on the NYSE on June 22.
Like Didi, the three platforms had to halt registration of new users during the review period. Unlike Didi, the PRC cyber authorities did not order a removal of the companies’ apps from app stores.
July 6
The CCP General Office and the State Council General Office issued a document targeting illegal activity in the securities market (關於依法從嚴打擊證券違法活動的意見).
The fifth point of the document was on “strengthening cross-border supervision and enforcement,” including international cooperation on cross-border supervision. The strengthening of cross-border supervision and enforcement calls for “improving relevant laws and regulations on data security, cross-border data flows, and confidential information management.” It also entails cracking down on “cross-border securities violations and crimes; strengthening supervision of Chinese concept stocks, and doing a good job in risks and emergencies pertaining to Chinese concept stocks.
July 7
1. The PRC State Administration for Market Regulation announced that fines had been issued in 22 cases concerning illegal business operators in the internet sector, with the stiffest fine set at 500,000 yuan. Eight of those cases involved wholly-owned subsidiaries of Didi; six involved Alibaba; five involved Tencent; two involved Suning, and one involved Meituan. Ten of the 22 cases concerned the transfer of control rights after equity acquisitions, while the other 12 involved joint ventures.
2. Hong Kong’s Hang Seng Tech Index fell 3.71 percent to 7,321.98 points. The index was also down 33.44 percent from a peak of 11001.78 points on Feb. 17, or a loss of about $831 billion for Chinese tech giants.
3. Republican Senator Marco Rubio said in a statement to the Financial Times that it was “reckless and irresponsible” to allow Didi, an “unaccountable Chinese company,” to sell shares on the NYSE. “Even if the stock rebounds, American investors still have no insight into the company’s financial strength because the Chinese Communist party blocks US regulators from reviewing the books. That puts the investments of American retirees at risk and funnels desperately needed US dollars into Beijing,” Rubio said.
Democrat Senator Bob Casey also told the Financial Times that “we must ensure entities listing on US exchanges play by the same rules as US firms and comply with regulations and auditing standards. The Chinese Communist party has the ability to exercise command and control over firms operating within its borders. At the same time the CCP restricts market access to US firms in order to support its own national champions, distorting markets and harming US workers.”
July 8
1. Reuters reported that the China Securities Regulatory Commission is establishing a team to review Chinese company IPO plans abroad, citing sources familiar with the matter. Companies looking to list abroad will also be required to seek approval from relevant ministries, a break from the past.
2. The Wall Street Journal reported that the CAC will take a lead role in strengthening interagency oversight over Chinese companies listed overseas, and especially those trading in the United States, citing sources familiar with the matter. The CAC will also “tighten rules for future foreign listings” and “fix a lack of coordination between regulators.”
3. According to several Western media outlets, Chinese companies LinkDoc Technology (backed by an Alibaba subsidiary) and Keep (backed by SoftBank and Tencent) canceled their plans to list in the United States. China’s biggest podcasting platform Ximalaya also scrapped its U.S. IPO in recent weeks, with the PRC authorities preferring that it lists in Hong Kong instead.
4. Republican Senator Bill Hagerty and Democrat Senator Chris Van Hollen called on the Securities and Exchange Commission to investigate whether Didi had misled U.S. investors by not disclosing that it had been contacted by PRC regulators before its listing.
July 9
1. The CAC ordered app stores to remove 25 more apps operated by Didi. Chinese websites and platforms are also banned from providing access to Didi-linked services in China.
2. According to the South China Morning Post, PRC regulators privately described Didi’s June 30 IPO as a “deliberate act of deceit,” or yang feng yin wei (陽奉陰違), citing a source familiar with the matter.
Another SCMP source said that CAC officials met with Didi executives in the second quarter of 2021 in Beijing, and those discussions “constituted channels to formally deliver the regulator’s instructions, with no room for defiance.”
A SCMP source noted that “while Didi’s U.S. listing complied with all of China’s applicable legislations, the means by which the company forced its way to New York betrayed trust and generated anger.”
3. According to The Wall Street Journal, “regulators in Beijing were under the impression Didi would pause its initial public offering while it addressed data-security concerns,” citing people familiar with Didi’s conversations with regulators. However “in New York, Didi offered assurances that Beijing had given it the green light,” according to people close to the listing process.
OUR TAKE
1. With the CCP tightening societal controls and stepping up financial deleveraging in recent years, Chinese companies are finding it more attractive to list abroad, and especially in the U.S., to sidestep political, financial, and legal risks on the mainland. And even though the U.S. is increasing supervision over listed Chinese companies, those companies likely believe that it is still less risky to list in America and cash out as opposed to listing in China.
According to data from Dealogic, 36 Chinese companies listed in the U.S. in 2020 and raised $13.6 billion, the most since 2014. Meanwhile, 36 Chinese companies have already listed in the U.S. in the first six months of 2021, raising a total of $12.6 billion; however, the issue price of about 70 percent of listed Chinese companies has since fallen due to increasing regulatory measures in the U.S. and China. And according to NYSE data from the end of April, about 60 Chinese companies are awaiting listing in 2021, though this number will likely shrink by the end of the year in light of the Didi case.
As for Didi, the company appears to have no choice but to get listed as quickly as possible. Didi has already gone through 21 financing rounds and cannot continually rely on this route to get cash. Also, the company was likely looking to cash out via an overseas IPO before Beijing officially implements a new data security law on September 1 and makes it even harder for Chinese companies to get listed abroad. Unfortunately for Didi, it has merely dug an even deeper hole for itself by rushing its U.S. listing.
2. Beijing likely went after Didi for some of the same reasons it went after Jack Ma and Ant Group last year, namely, to shore up regime security amid mounting domestic and foreign problems facing the CCP and to stop Xi’s factional rivals from profiting massively from blockbuster IPOs of giant Chinese internet companies (see our previous analyzes here, here, and here).
For the CCP, there is also the fear that regime security would be endangered if Chinese tech companies handed over to foreign actors vast amounts of extremely valuable user data as part of foreign listing disclosures or audits of U.S.-listed Chinese companies. Didi would almost certainly possess crucial data that could reveal the workings of the PRC government (location of secret intelligence bases, government operations, etc.) or the personal activities of Chinese officials. For instance, a July 18, 2015 Xinhua report noted that Xinhua’s media center and Didi’s Media Research Institute used real-time generated mobile travel data to analyze the overtime work status of central government departments working in hot weather. No doubt the CCP intended at the time to tout how “industrious” its officials were under adverse weather conditions. The propaganda stunt, however, inadvertently exposed the sort of sensitive data held by Chinese private companies that could become available to foreign countries should U.S. audits become stricter in the future.
3. Unlike the Ant Group case, Beijing failed to stop Didi before it went public in the United States. The publicly available information we cited above explained that Didi appeared to receive mixed signals from regulators and also pressure from investors. Those reasons are likely accurate in considering Chinese tech company culture, the factional background of Didi’s investors, and the fact that the CCP’s “permanent bureaucracy” is not entirely loyal to Xi Jinping.
According to Chinese private equity data platform “CVS Investment Data” (CVS投中數據), nearly 20 of Didi’s investors since 2015 were state-owned enterprises, including CITIC Capital. In 2015, Liu Lefei, the son of Jiang faction member and then-Politburo Standing Committee member Liu Yunshan, was chairman and CEO of CITIC Private Equity Fund. Also, Didi’s seven directors include Daniel Zhang (Alibaba), Chen Zhiyi (Boyu Capital), and Liu Chiping (Tencent); Boyu Capital and Alibaba are linked with the Jiang faction. There is a distinct possibility that Xi’s factional rivals and China’s Big Tech elements decided to take advantage of Beijing’s preoccupation with the CCP centennial celebrations to push Didi to go ahead with the U.S. IPO in the hopes of getting away with it amid the hubbub and profiting at Xi’s expense. Meanwhile, Didi could have been reassured by the political strength of its investors and elite backers to go along with the plan; if this was indeed the case, then Xi Jinping is greatly lacking in “quan wei,” has problems getting his orders out of Party headquarters at Zhongnanhai (政令不出中南海), and is facing very serious factional struggle challenges.
Then there is Chinese tech company culture. Many of China’s present tech giants like Alibaba and Tencent enjoyed rapid growth and expansion during the Jiang faction’s era of dominance (1997 to 2012), which was marked by loose government regulation and massive corruption. These tech companies would also have the backing of Party princelings and other powerful members of the CCP elite. Thus, companies like Alibaba and maverick CEOs like Jack Ma would have developed a sense of “untouchability” and believe that they can take huge risks or even sidestep the CCP authorities and get away with it by virtue of political connections and their being “too big to fail.” While Didi is a relatively new tech company, its founder Cheng Wei was a former Alibaba executive, and would be familiar with the corporate environment of the Jiang faction era. Didi also has on its board and as its investors executives of established Chinese tech giants. The heady combination of Chinese tech company culture and influence from veterans of the industry could partly explain Didi’s audacity and recklessness in going through with its listing despite not getting clear signals to go ahead from Beijing.
4. Beijing’s clampdown on Didi should not be taken to mean that Xi Jinping and the CCP are against foreign investment. On the contrary, the greater opening up of China’s financial sector under Xi in recent years indicates that Beijing very much wishes to attract foreign funds to China to both grow and save the Chinese economy. Xi, however, cannot let the ambitions of Chinese private companies threaten regime security and his bid for a norm-breaking third office term at the 20th Party Congress. From Xi’s perspective, it is far better to rein in Didi and other “rogue” Chinese tech companies now to safeguard regime security and secure his rule, even if it means loss of reputation in the eyes of international investors and diminished profits for Chinese tech companies in the short term. Moreover, Xi has little tolerance for his factional rivals generating immense profits at his and the regime’s expense.
Xi’s actions, however, have undoubtedly harmed many interests, particularly powerful parties at home and abroad who are already at odds with him. Having lost another pile of cash, the Jiang faction, Party princelings, and the “anti-Xi coalition” on the mainland have even more incentive now to undermine Xi before the 20th Party Congress in 2022. Western establishment elites and Wall Street interest groups also have additional reason to press ahead with their “anti-Xi, not anti-CCP” strategy.
Xi Jinping has cranked up the pressure against himself by getting tough on Didi. Yet the alternative—not doing anything to punish Didi—would only embolden Chinese tech companies to make more reckless moves and further put Xi and the CCP in jeopardy. Repeated attempts by Xi’s opponents to put him in “lose-lose” scenarios will bring factional struggle in the CCP to a head, hastening the arrival of the regime’s “Berlin Wall moment” and the emergence of political Black Swans.
SinoInsight 2
On July 8, the PRC Supreme People’s Procuratorate issued a document about a hundred-day campaign (early June to late September) to tackle judicial staff misconduct (司法工作人員職務犯罪偵查百日攻堅行動實施方案).
According to the document, the judicial system needs to take guidance from “Xi Jinping Thought on Socialism With Chinese Characteristics for the New Era” and “concentrate on tackling tough problems, and focus on investigating and prosecuting the batch of judicial personnel who use their position to abuse power, practice nepotism, and partake in other criminal activity.”
The document elaborated on the five types of cases that will be handled during the the 100 days:
- National and provincial-level cases assigned by the National Political and Legal Affairs Education and Rectification Office and the Central Supervision Group.
- Cases assigned by the national and regional “sweeping black” and anti-“protective umbrella” campaign authorities.
- Cases involving judicial staff misconduct like having criminals “serve sentences on paper” (紙面服刑), accepting bribes to let criminals out of prison, etc.
- Major, difficult or complicated cases that people in a region are highly concerned with or impacted by.
- Cases involving major crimes related to judicial staff misconduct at the level of county and above.
OUR TAKE
1. The CCP’s hundred-day campaign to tackle judicial staff misconduct seems to be a move by Xi Jinping to accelerate the ongoing rectification of the political and legal affairs apparatus. The procuratorate system appears to be heeding Xi’s encouragement to “turn the blade inwards” (刀刃向內) and is setting an example for other departments and organs (Supreme People’s Court, Ministry of Public Security, Ministry of Justice, etc.) to follow.
2. Zhang Jun, the current Procurator-General of the Supreme People’s Procuratorate and former justice minister, is 65 this year and eligible to retire at the Two Sessions in 2022 at the earliest or the Two Sessions in 2023 at the latest. However, Zhang’s enthusiastic implementation of Xi Jinping’s orders means that could continue holding office in other capacities after his term as Procurator-General expires. For instance, Zhang could be transferred to the National People’s Congress or the Chinese People’s Political Consultative Conference to serve on their legal committees as a vice chairman. It is possible that the hundred-day campaign is Zhang’s way of meeting the current “political correctness” benchmark in Xi’s regime and show his fealty to Xi so as to escape scrutiny and secure his semi-retirement prospects. And if Zhang is duly rewarded for his efforts, other CCP officials will be encouraged to follow his lead, a development that would spell trouble for Xi’s factional opponents.
A review of Zhang Jun’s official career marks him as a member of the Xi camp. After the 18th Party Congress in 2012, Zhang was transferred from vice president of the Supreme People’s Court to the Central Commission for Discipline Inspection to serve as then-CCDI secretary Wang Qishan’s deputy. In February 2017, he was appointed as justice minister and promoted to the ministerial rank, paving the way for him to become Procurator-General later that year at the 19th Party Congress.
3. The timing of the hundred-day campaign to tackle judicial staff misconduct will likely coincide with the CCP elite’s upcoming Beidaihe meeting. Clearly, Xi is using the campaign and its potential to “unearth” dirt on his factional rivals to put the latter on notice and give himself leverage in 20th Party Congress personnel discussions (including the topic of his third office term) at Beidaihe. For instance, the fourth and fifth types of cases that the campaign will look into (see above) could implicate high-ranking Jiang faction members involved in high-profile political and legal affairs scandals like the “Shaanxi 100 Billion Mining Case” or other serious misconduct.
