Didi Cybersecurity Probe: Validates Pre-IPO Warning

Didi Faces Regulatory Scrutiny in China

Didi, a leading Chinese ride-hailing company, is experiencing a significant decline in its share price following reports of a regulatory investigation by domestic authorities. The official statement regarding the inquiry suggests a focus on preventing potential national data security risks and safeguarding public interests.

Just yesterday, regulators instructed Didi to temporarily suspend the registration of new users while the investigation is underway.

Broader Context of Tech Regulation in China

This action is part of a wider trend of increased government oversight within China’s rapidly expanding technology sector. Recent examples include increased scrutiny of Jack Ma and the abrupt cancellation of Ant Group’s initial public offering (IPO), alongside a general tightening of regulations concerning data collection practices by tech firms.

China isn’t alone in addressing the power of its tech sector; India has also been vocal about regulating technology companies operating within its borders. However, the United States, while discussing potential limitations on Big Tech, appears less inclined to implement substantial changes to the market influence of these companies.

Given Didi’s prominence and extensive collection of user data, its scrutiny isn’t unexpected. Numerous other data-intensive technology companies in China are currently facing heightened regulatory attention.

The timing of this investigation, so soon after Didi’s U.S. initial public offering, is viewed negatively by many observers.

Concerns About the Timing of the Investigation

A cynical interpretation suggests that Chinese authorities permitted the company to launch its IPO in the United States to secure funding from international investors. Subsequently, the government initiated the cybersecurity probe, potentially leaving investors with financial losses.

Applying Hanlon’s Razor, it’s important to consider less malicious explanations.

As of today, Didi has not released a new filing with the Securities and Exchange Commission (SEC), and its investor relations page currently lacks any information pertaining to the recent developments.

Risk Factors Disclosed During the IPO

During its IPO process, Didi proactively cautioned investors about the inherent risks associated with being a Chinese company, particularly concerning government intervention, and a Chinese company listing on a U.S. exchange. The company highlighted several risk factors related to its business operations:

The company also specifically identified the relationship between China and the United States as a potential risk.

Furthermore, within a section detailing potential structural risks, Didi emphasized the following (emphasis added):

This disclosure appears thorough and comprehensive.

Implications for Future IPOs

Considering the precedent set by the halting of the Ant Group IPO, it’s unlikely the government was unaware of the potential to postpone Didi’s debut. Therefore, the timing of the news either reflects remarkably unfortunate coincidence or a deliberate attempt to discourage foreign investment.

Regardless of the intent, this situation casts a negative light on Chinese companies seeking to list on U.S. stock exchanges. Other recent U.S. IPOs of China-based companies, such as DingDong and MissFresh, have experienced declines of 5% and 3% respectively this morning, while the broader domestic market is rallying due to positive employment data.

Previous analysis by The Exchange has suggested that China-based IPOs may be valued at a discount compared to similar U.S. companies. While this argument relies on limited data, today’s events are unlikely to invalidate it.

Wishing you a pleasant Friday.