ONOT INTRIGUING The question about China is whether it can combine brutal and autocratic politics with the predictable rules and property rights that entrepreneurs and capital markets need to thrive. The recent government attack on Didi Global, a Chinese rideshare company that just listed its shares in New York, suggests not. It’s a warning to investors around the world and to anyone hoping to make a fortune moving to China.
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Didi is one of the Chinese superstars, with 493 million users (more than Uber), 15 million drivers and a presence in Brazil and Mexico. It listed its shares on June 30, raising cash from global investors and valuing the company at $ 68 billion. Its prospectus contained 60 pages of “risk factors,” including a regulatory crackdown, on which most investors have fallen asleep. But almost immediately one of them arrived.
It appears that Didi pursued registration against the will of the Cyberspace Administration of China. On July 4, the regulator hit back, claiming that Didi broke rules on collecting personal data and banned it from mobile app stores in China. This caused Didi’s share price to drop by more than 20%. Marco Rubio, a hawkish US senator, said it was “unwise” to allow Didi to float in New York.
China’s tech industry has been one of the fastest growing sectors of the global economy over the past decade. Hundreds of big startups have yet to follow giants like Alibaba, Tencent and Didi in listing their stocks. The intersection of e-commerce, payments, and “super apps” means that most day-to-day transactions in China can be done on a smartphone. Global capital and talent have been essential to the growth of the industry. Didi has large foreign shareholders, including SoftBank and Uber, and owns a stake in Southeast Asian rival Grab. Many of its senior officers were educated at Western universities and worked in American companies. Almost all of the biggest Chinese tech companies are listed in America or Hong Kong rather than the mainland. They have cosmopolitan frameworks and benefit from a flow of ideas across borders.
The crackdown began last year when Chinese regulators called Ant Group’s $ 300 billion IPO in Hong Kong and Shanghai at the last minute. The government then threatened other tech companies and humiliated tycoons, including Jack Ma, co-founder of Alibaba and founder of Ant.
All governments are concerned about data privacy and monopolies, but China’s interventions signal a systematic attack on the technology by the party. On July 7, Bloomberg announced that China may reconsider the use of “variable interest entities,” a legal structure that underpins nearly all foreign investment in Chinese technology. The message is clear: Powerful tech companies must defer to the Communist Party, their bosses must be silent, and the property rights of foreign owners can be violated.
An optimistic view is that repression is a political theater. Global businesses have often been torched in China just to recover. South Korean and Japanese companies faced boycotts and protests which then faded away. The Chinese government shunned foreign banks for a while, to punish them for perceived mistakes, but ended up welcoming them again.
This time may be different. Foreign investors have lost hundreds of billions of dollars, which could permanently alter the supply of global capital to China. To fill this void, Chinese companies will depend on less sophisticated mainland markets. Once again, entrepreneurs and investors must weigh and again weigh the vast rewards of Chinese markets against the risks of its opaque laws, intimidation of paranoid officials and leaders. If you were risk-averse, unorthodox, and keen to start a mold-breaking business, would you still choose to do it in China? ■
This article appeared in the Leaders section of the print edition under the title “Hit and run”