China tech rout widens as focus turns to US listings, data security

Regulator concludes probe into 22 more incidents of tech firms violating anti-monopoly law

Companies involved in the latest crackdown include subsidiaries of tech behemoths Alibaba and Tencent, as well as ride-hailing platform Didi (above). According to documents, the firms had either formed joint ventures without prior authorisation, or a
Companies involved in the latest crackdown include subsidiaries of tech behemoths Alibaba and Tencent, as well as ride-hailing platform Didi (above). According to documents, the firms had either formed joint ventures without prior authorisation, or abused their dominant market position.PHOTO: AGENCE FRANCE-PRESSE

BEIJING • China's antitrust regulator yesterday said it had concluded investigations into 22 more incidents of tech firms violating the Anti-Monopoly Law, fining the companies 500,000 yuan (S$104,000) for each offence.

Companies involved include subsidiaries of tech behemoths Alibaba and Tencent, as well as ride-hailing platform Didi.

According to documents released by the State Administration for Market Regulation, firms had either formed joint ventures without prior authorisation, or abused their dominant market position.

In one instance, a subsidiary of Didi had entered a joint venture with an automotive manufacturer based in the north-eastern city of Changchun, but failed to declare the partnership despite both companies' turnovers meeting the minimum quantum.

Most of the other 21 cases involved similar circumstances.

Some of the firms, including Tencent and Didi, had been censured for similar offences in late April.

This move is the latest in a series of actions against China's tech giants as Beijing steps up regulation of the industry, most recently investigating Didi for illegally collecting user data.

China's technology giants have wiped out a combined US$831 billion (S$1.1 trillion) since their February peaks, and Beijing's expanding crackdown on the sector is fuelling investor concern that the sell-off is far from over.

On Tuesday, Beijing issued a sweeping warning to its biggest companies, vowing to tighten oversight of data security and overseas listings just days after Didi Global's contentious decision to go public in the United States.

While the statement from China's State Council was thin on details, it suggests Beijing is preparing to intensify a crackdown on its corporate sector that has spanned everything from property debt and fintech to antitrust issues and now cyber security.

Rules for overseas listings will be revised, China's Cabinet said, while publicly traded firms will be held accountable for keeping their data secure.

China also said it will step up its regulatory oversight of companies trading in offshore markets.

China's move to rein in two of the most powerful corporate trends of the past decade - the rise of data-hungry tech titans and the flood of Chinese listings in the US - is rippling through markets as investors brace themselves for a new era of tighter oversight from Beijing.

The Hang Seng Tech Index, whose members include many of China's biggest tech firms, fell as much as 1.9 per cent yesterday, poised for its sixth straight day of declines.

Tencent Holdings and Meituan fell as much as 3.7 per cent, among the biggest decliners on the index. Alibaba Group Holding dropped 2.1 per cent.

Didi sank 20 per cent in US trading on Tuesday to US$12.49, wiping out about US$15 billion of market value, taking the stock below the US$14 IPO price.

Investors are likely to take "a sell first, talk later approach" to limit policy risks in their portfolio, said Mr Justin Tang, head of Asian research at United First Partners.

While there remains considerable uncertainty about how China will implement a crackdown, the impact has the potential to be far-reaching. Increased regulation is likely to slow the pace of Chinese listings in the US and reduce the lucrative fees that flow to Wall Street.

Technology firms will face more restrictions on the use of data that makes their business so profitable. The risk of economic decoupling between China and the US will only grow as the two governments act to safeguard national security, especially in the sensitive tech industry.

"It is a big step from China, but on the other hand it is part of a series of events that started over a year ago," said Mr Peter Garnry, head of equity strategy at Saxo Bank in Hellerup, Denmark. "The uncertainty is still over to what degree all of this regulation will impact longer-term profitability."

Chinese companies have flocked to US exchanges in recent years, especially from the tech industry, despite efforts by Beijing to encourage companies to list back home. Chinese firms have raised about US$76 billion through first-time share sales in the US in the past decade. Last month alone, they raised US$7.9 billion, the most since Alibaba Group Holding's IPO in September 2014, according to data compiled by Bloomberg.

Chinese companies have listed abroad outside of regulators' purview largely through the Variable Interest Entity model. That system has never been formally endorsed by Beijing but has been used by virtually every tech titan to tap foreign investors.

Under the structure, Chinese corporations transfer profits to an offshore entity with shares that foreign investors can then own.

US exchanges are at the same time becoming more hostile to Chinese firms, which may face delisting if they refuse to hand over financial information to US regulators.

An effort by the US Securities and Exchange Commission to gain access to audits of overseas companies, which began under former president Donald Trump, is continuing under the Biden administration. Some Chinese firms have said China's national security laws prohibit them from turning over audit papers to US regulators.

Beijing has grown increasingly concerned over the amount of data that Didi and other tech firms hold.

China's campaign to impose tougher controls on the nation's tech firms was forcefully demonstrated late last year when the authorities pulled Ant Group's US$35 billion dual listing in Shanghai and Hong Kong.

But Chinese regulators currently do not possess the power to stop many of the nation's firms from listing in the US.

The latest statement from the State Council makes special provisions for cross-border data supervision, which suggests that overseeing sensitive information has become one of the most important regulatory fields in China, said Mr Xia Hailong, a lawyer at Shanghai-based Shenlun law firm.

"Since there is no mechanism in place for cross-border supervision of securities, conducting a security review on data could serve as an effective tool for Chinese regulators to rein in overseas listed companies," Mr Xia said.

BLOOMBERG

Additional reporting by Elizabeth Law

A version of this article appeared in the print edition of The Straits Times on July 08, 2021, with the headline 'China tech rout widens as focus turns to US listings, data security'. Subscribe