Chinese stocks see volatility over delisting risk – The Average Joe

    Chinese stocks see volatility over delisting risk

    Victor Lei — Head of Research

    December 7, 2021

    didi global

    December 7, 2021

    Didi learned the hard way — don’t go against China. Last Friday, the Uber of China — Didi (NYSE:DIDI) — announced plans to delist from the NYSE — months after going public. The move sent Didi down 14% since last Friday — and down 52% since its IPO.

    China always gets what it wants

    Right before its IPO, Chinese officials warned Didi to conduct a security investigation before going public. But Didi didn’t and now it’s facing China’s wrath.

    Over the past year, Chinese regulators made it harder for Chinese companies to go public abroad — first requiring companies with data on at least a million people to go through a cybersecurity and national security review.

    So China made an example out of Didi:

    • Of the largest Chinese tech companies, China says Didi has “the most detailed personal travel information”.
    • With 88% of the Chinese ride-hailing market share, Didi holds a lot of data — making it a big security threat in China’s eyes.

    But China’s regulations go beyond security — targeting tech giants’ growing influence and power — while US investors become collateral damage.

    The US and China aren’t on the same page…

    The US wants more information on US-listed Chinese companies — while China wants to protect sensitive information.

    Last Thursday, the SEC finalized rules to ban foreign companies from US exchanges if they don’t meet auditing requirements. Foreign companies have until 2024 to abide by the rules:

    • Chinese companies must have their audits inspected by the US PCAOB.
    • Those that don’t comply may be booted off the US exchange.

    But China has its own plans of banning variable interest entities (VIE) — a loophole used by Chinese companies to go public overseas, according to Bloomberg.

    The China Securities Regulatory Commission came out with its own statement on Sunday —  saying reports of them promoting companies to delist from the US is “completely misleading”.

    Investors: Chinese Roulette

    For now, it looks like Chinese companies are less likely to go public in the US. But what will happen to those that are currently listed?

    • 200+ Chinese companies listed on US exchanges (via VIE structure) risk being delisted.
    • Some of the largest companies using a VIE structure include: Pinduoduo (NASDAQ:PDD), NIO (NYSE:NIO), Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU).

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