Chinese cybersecurity probe validates Didi’s pre-IPO warning to investors

Shares of Chinese ride-hailing provider Didi are sharply lower this morning after news broke that its domestic regulators are investigating the newly public company. A loose translation of the probe’s official notice indicates that the cybersecurity review is “in order to prevent national data security risks, maintain national security and protect the public interest.”

Yesterday, regulators ordered Didi to stop registering new users during the investigation.

The move comes amid a larger reset of relations between China’s burgeoning technology sector and its autocratic government. Other fallouts from the campaign included the effective silencing of Jack Ma, the embarrassing cancellation of the Ant IPO and a crackdown on data collection from technology companies more broadly.

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China is not the only nation grappling with its technology sector; India has made consistent noise in recent months regarding tech firms inside its borders, for example. And there is effort inside the U.S. Congress to put some cap on Big Tech’s scale and power, though of the trio, the United States appears the least likely to take a real swipe at technology companies’ market influence.

That Didi has run afoul of China’s regulatory bodies is not a surprise; it’s a well-known tech company in the country with lots of consumer data. Similar data-rich tech shops in the country have come under increased scrutiny as well.

But to see Didi get taken to task mere days after its U.S. debut puts a bad taste in our mouths.

The way that this saga reads from the cynical perspective is that the Chinese Communist Party was willing to let the company go public in the United States, allowing it to raise billions of dollars from foreign sources. And that the ruling party was then content to leave them holding a midsized bag by announcing its cybersecurity probe.

Hanlon’s Razor is at play in this situation, naturally.

Didi has not published a new SEC filing since June 30, and, as of the time of writing, its investor relations page is devoid of any information regarding today’s news.

While going public, it’s worth noting that Didi did warn investors that it faces a host of risks relating to its status as a Chinese company, namely its government, and as a Chinese company going public in the United States. Observe the following risk factors that it shared while going public (emphasis added) that dealt with the company’s business operations:

• Our business is subject to numerous legal and regulatory risks that could have an adverse impact on our business and future prospects.
• Our business is subject to a variety of laws, regulations, rules, policies and other obligations regarding privacy, data protection and information security. Any losses, unauthorized access or releases of confidential information or personal data could subject us to significant reputational, financial, legal and operational consequences.
• Our business is subject to extensive government regulation and oversight relating to the provision of payment and financial services.
• Adverse litigation judgments or settlements resulting from legal proceedings or investigations in which we may be involved could expose us to monetary damages or limit our ability to operate our business.
• We may be subject to pricing regulations, as well as related litigation, regulatory inquiries or investigations.

The company also listed China-United States relations as a risk:

• The current tensions in international trade and rising political tensions, particularly between the United States and China, may adversely impact our business, financial condition, and results of operations.

And in a section of potential issues titled “Risks Relating to Our Corporate Structure,” Didi noted the following (emphasis added):

• If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
• Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and operations.
• Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business, financial conditions and results of operations.
• Claims and/or regulatory actions against us related to anti-monopoly and/or other aspects of our business may result in our being subject to fines, constraints on or modification of our business practice, damage to our reputation, and material adverse impact on our financial condition, results of operations and prospects.
• Uncertainties with respect to the PRC legal system could adversely affect us.
• Recent litigation and negative publicity surrounding China-based companies listed in the United States may negatively impact the trading price of our ADSs.
• The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

That feels comprehensive.

As we learned watching the dramatic death of the Ant Group IPO, the Chinese government has no issues halting a public debut. So do we doubt that the government could have put a stop to the Didi debut? That makes the timing of the news either an example of magnificently poor accidental timing by uncaring bureaucrats or a conscious decision to somewhat take the piss out of foreign investors.

Either way, it’s a bad look for Chinese companies hoping to list on U.S. exchanges. Other recent China-based U.S. IPOs like DingDong and MissFresh are off 5% and 3% this morning, while the larger domestic stock market rallies in light of the strong June jobs report.

The Exchange has explored the concept of what appear to be discounts for China-based debuts compared to similar U.S. companies on domestic exchanges; there are easy arguments to make that we’re extrapolating a bit too hard on somewhat scarce data points. But today’s news likely won’t help our argument become less true.

Happy Friday.