Last Friday, Chinese regulators decided to prohibit new users from downloading Didi, the country’s most popular ride-hailing app, just weeks after the company debuted on the New York Stock Exchange, sending the company’s shares down by as much as 25% and prompting a broad reevaluation of the risks of investing in Chinese stocks. Members of Congress were also enraged by the developments, as there is a growing bipartisan consensus in Congress to protect American investors from Chinese corporations that fail to fulfill US corporate transparency laws.
In a statement, Florida Republican Sen. Marco Rubio said that allowing Didi Global Inc. DIDI, -5.24 percent to list on the NYSE was “reckless and irresponsible,” adding that “even if the stock recovers, American investors will still have no insight into the company’s financial strength because the Chinese Communist Party prevents U.S. regulators from reviewing the books.” This jeopardizes American seniors’ savings and diverts badly needed US funds to Beijing.” In a response to MarketWatch, Pennsylvania Democrat Sen. Bob Casey lambasted the Chinese for “restricting market access to U.S. enterprises in order to favor its national champions.” He went on to say that these measures “distort markets” and “hurt workers,” and that they shouldn’t be assisted by enabling Chinese corporations to raise funds from Americans if they don’t obey American standards. Rubio and Casey presented the No IPOs for Unaccountable Actors Act in June, which would direct financial authorities to bar any firm from completing an initial public offering if it does not follow US auditing regulations. The plan expands on the Holding Foreign Companies Accountable Act, which was signed into law last December by both houses of Congress with unanimous support. Foreign corporations have three years to comply with US accounting and reporting rules before being removed off US markets under this provision. The statute also demands verification that foreign corporations listed on the New York Stock Exchange are not owned or controlled by a foreign government. Given other anti-China legislation that is nearing completion, Owen Tetford, a research analyst at Beacon Policy Advisors, told MarketWatch in an interview that the Rubio-Casey bill is unlikely to succeed this year. However, he highlighted that both parties are committed to protecting American technology and inventive enterprises, with little support for initiatives that would benefit China’s tech sector. In the near future, there will be a slew of class action lawsuits Experts predict a slew of class-action lawsuits on behalf of Didi Global Inc. investors, alleging the company misled them about the existence of a regulatory inquiry. In an interview, Jason Vigna, a securities litigator at the law firm Mintz, said that under US securities law, public companies like Didi are not required to inform investors about ongoing investigations because the existence of a government investigation does not imply that the company did anything wrong or will face sanctions. “It would be misleading if corporations were out there all the time stating that we received an enquiry from some government agency somewhere in the world,” he said, because investors wouldn’t know how to interpret it. Nonetheless, plaintiffs’ lawyers have begun preparing class action lawsuits on behalf of Didi investors, with the law firm Glancy Prongay & Murray filing a complaint on Tuesday on behalf of Didi investors, alleging that Didi knew about the investigation as early as three months ago and submitted documents to US regulators that were “materially false and misleading and [which] omitted…material adverse facts.” The complaint, according to Vigna, attempts to show that management should have known the investigation would result in serious penalties, but the case is “very weak” due to the difficulty of proving company management’s mental state and actual interpretation of events as it learned about the investigations. However, until we learn more about the scope of China’s probe into the corporation, it is likely too early to predict how this legal struggle — and the likelihood of an SEC investigation or enforcement action — will play out. Vigna went on to say. The massive losses, on the other hand, appear to strengthen Rubio’s claim that the SEC should have barred the Didi IPO from the start. In a statement released in June, he urged the SEC to do just that, claiming that “every time the SEC enables businesses like Didi to list on American exchanges, it flows urgently needed U.S. cash into Beijing and puts American retirees’ investments at risk.” The impact on American investors Not only are American lawmakers becoming increasingly skeptical of US investment in China’s digital sector, but the Chinese are also taking steps to prevent domestic companies from seeking funding abroad, particularly in the United States. According to Bloomberg, Chinese regulators are exploring new rules that would compel Chinese companies to get approval before going public in Hong Kong or the United States. According to MarketWatch, Nick Colas, the founder of Datatrek research and the lead analyst on the first Chinese business to go public on the NYSE, has been advising investors against Chinese IT companies because of the threat the enormous Chinese regulatory apparatus poses to company values. “The regulatory procedure in China is significantly different from that in the United States, which is very public and visible,” he said. “The Chinese government wields far more power in all areas. I believe that some US investors believe it is just a somewhat stricter version of the US, but it is not. It’s a different order of magnitude.” Indeed, the Didi news has dampened Chinese tech equities more widely, with the Invesco China Technology ETF CQQQ, -0.28 percent down around 7% since the beginning of July, signaling that some investors are waking up to the realities of Chinese regulatory risk./n
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