Exit Through Offshores: Is It Dangerous To Invest In Chinese IPOs

The largest Chinese companies – Weibo, Tencent, Alibaba – have successfully entered the US stock exchange, using loopholes in their country’s legislation. Now the Chinese authorities want to change the rules for local companies to IPO. They began reviewing the DiDi taxi ordering service, which recently went public in the US, and forced the country’s largest audio platform, himalaya, to abandon the idea of ​​listing outside the PRC. What are the risks faced by investors in Chinese companies?

The Chinese authorities no longer want local companies to conduct IPOs on foreign exchanges. China’s largest podcasting platform himalaya has already ditched plans to list its shares in the US and chose the Hong Kong Exchange instead. And the shares of the taxi ordering service DiDi plummeted 11% immediately after a successful listing on the New York Stock Exchange (NYSE) due to the requirements of the Chinese regulator to remove its application from stores. Is it dangerous to invest in the IPO of Chinese companies?

Last IPO

The DiDi taxi ordering service has become one of the last Chinese companies to list outside the PRC. DiDi, which has been preparing for an IPO for several years, went public on the NYSE on June 30, 2021, and raised $ 4.4 billion. The company sold 317 million shares at $ 14, the upper limit of the announced price range.

Thus, within the framework of the IPO, investors valued the company at $ 67 billion, and taking into account the conversion of bonds and the exercise of options, the market value of DiDi could exceed $ 70 billion, The Wall Street Journal wrote, citing sources. According to Bloomberg, this is the second-largest public offering by a Chinese company in the United States after Alibaba, which raised $ 25 billion in an IPO in 2014.

However, two days after the successful listing of shares, DiDi collapsed by almost 11%. The Chinese Internet regulator – the Office of Cyberspace – began checking the company and banned new users from registering with the service during this time. The purpose of the audit is to protect national security, the regulator said. On July 5, the internet regulator demanded that the DiDi app be removed from all stores operating in the United States. The investigation was triggered by “a serious violation by the company of legislation on collecting and using personal data,” the Office said. 

These measures led to DiDi shares at the opening of trading in the United States on July 6 fell by 25% – the share price was $ 11.97, and on the day of listing, its value reached $ 16.65 per share.

Bloomberg reported on July 7, citing sources, that the Chinese authorities are planning to change the rules for local companies to IPO abroad. Virtually every major Chinese internet company has incorporated its structure offshore – often in the Cayman Islands. This made it possible to bypass the barriers set by the Chinese regulator and attract money from foreign investors before the IPO. If the authorities introduce new rules, then Chinese companies will not go public in the United States or Hong Kong without Beijing’s approval.

Immediately after the news of the most popular Chinese fitness app, LinkDoc Technology, at the last moment, refused to launch an initial public offering on the American Stock Exchange Nasdaq despite already closing the bid book. LinkDoc filed for an IPO in June; the company planned to sell 10.8 million shares during the IPO at prices ranging from $ 17.50 to $ 19.50 per share. LinkDoc Technology is the first Chinese company to postpone an IPO due to a Chinese regulator, Reuters writes. 

According to the Financial Times, China’s largest podcasting platform, Himalaya, has also pulled back from an IPO in the United States. In May 2021, Reuters reported that the Chinese authorities insisted that Ximalaya conduct an IPO not in the United States but in Hong Kong. Beijing’s concerns are caused by the fact that the US regulator will have access to many audit documents of the Chinese company, which contain user and other data, the agency wrote.

According to the analytical company Refinitiv, 34 Chinese companies, including DiDi, floated on US exchanges in 2021. They raised a record $ 12.5 billion in funds. Reuters writes that eight Chinese companies have filed with the US Securities and Exchange Commission (SEC) for IPOs by the end of 2021 – for example, a platform where you can order cleaning Daojia Ltd and hotel chain Atour Lifestyle Holdings.

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