The Didi share price [DIDI] opened 30 June 2021, the day of its much-anticipated IPO, at $16.65. Despite reaching a high of $18.01, it closed the day down from its open at $14.14.
On 1 July it looked as though the Didi share price was set for a rise, closing up just short of 16% up on the previous day at $16.40. However, the Didi share price fell to $15.53 on 1 July, and things went from bad to worse from here for the Chinese ride-hailing firm.
On 6 July, the Didi share price crashed to $12.49, 11.7% down since its opening day and 19.6% down over the long weekend. Over the next two days, the Didi share price continued to fall, closing 8 July at $11.21. However, the Didi share price rallied slightly on 9 July to a high of $12.22, before falling to $11.16 at close on 12 July, down 26.7% on its first-day close.
Didi’s decision to list in the US appears to have been the final straw for the Chinese government, which had become increasingly concerned about its biggest data companies listing overseas.
Since 1994, a legal loophole has existed that allows Chinese companies, especially large technology platforms, to effectively list overseas despite harsh restrictions on foreign ownership by entering into “contractual arrangements” with a foreign-listed intermediary.
This intermediary — effectively a shell company — offers its shareholders control over the Chinese company thanks to one legal agreement, and offers remuneration based on the company’s financial performance thanks to another. The model, known as Variable Interest Entity (VIE), has been accepted by the market for some time, but it appears that Beijing’s patience has worn out.
On 6 July, China’s State Council issued a statement that promised to increase oversight of overseas listings in the interests of data security. Early indications are that Chinese regulators intend to close this loophole, requiring companies hoping to use the model to list overseas to first obtain government approval.
The announcement sent the Didi share price tumbling, but the wheels had been set in motion four days previously when the Cyberspace Administration of China (CAC) announced an investigation specifically into Didi.
Didi's share price fall after probe announcement
The probe blocked Didi from registering new users, thereby removing its app from online stores. It is expected to focus on the real-time mobility data Didi collects from its user base in China and 15 international markets, with the agency citing Chinese national security and cybersecurity laws in the interests of national security and the public interest.
The probe’s announcement sent the Didi share price down more than 10% on 2 July, with the broader clampdown on foreign-listed companies the following week exacerbating the trend. Shareholders reacted angrily to the probe, and some insisted that potential cybersecurity regulation hadn’t been mentioned during the company’s IPO roadshow.
Chinese tech squeezed
The most recent wave of escalations has big implications beyond the Didi share price. Closing the VIE loophole would have profound impacts across the Chinese tech sector, which has been suffering since last year when a feud broke out between Alibaba [BABA] founder Jack Ma and the Chinese Communist Party (of which Ma is, ironically, a member).
China’s clampdown on foreign listings is exacerbated by the fact that US regulators are becoming increasingly intolerant of opaque Chinese businesses listing on their exchanges. The combined regulatory pincer effect has the potential to cause major disruption to the way these businesses operate and attract investment.
Returns fall of the KraneShares CSI China Internet ETF over past 12 months
The KraneShares CSI China Internet ETF [KWEB], which tracks Chinese internet companies, has fallen 9.3% in the last 12 months and 19.4% in the year to date, thanks to the turmoil squeezing the sector. The fund was expected to hold Didi stock within 10 days of the IPO; however, as of 13 July, this doesn’t appear to be the case. Alibaba is the fund’s second-largest holding, with 9.15% of net assets.
However, Didi Chuxing’s stock is held by the Renaissance IPO ETF [IPO], which tracks companies that have debuted within the last two years. Didi is the fund’s 36th largest holding, with 0.71% of its weight as of 13 July. Renaissance gained 0.9% in 2021 to 12 July and 49.8% over the trailing 12 months.