Didi’s New York delisting signals an end to Chinese firms’ glory days on U.S. exchanges

The news rocked Chinese tech stocks. The Hang Seng Tech Index, which tracks the exchange’s largest tech stocks, reached record lows after dropping as much as 2.7% on Friday; it closed down 1.5% on the day. The share prices for tech giants Alibaba, Baidu, and Tencent each dropped by over 2% in Hong Kong trading on Friday.

Didi has been sandwiched between increasingly scrupulous regulators in Beijing that are seeking to rein in the country’s tech giants and threats from the U.S. Securities and Exchange Commission (SEC) to enhance disclosure requirements for Chinese firms on U.S. exchanges. So Didi’s choice to move to Hong Kong may alleviate some investor concerns in the short run, even if it prompts larger questions about the future of Chinese companies raising capital in U.S. markets.

“The market was fearing [the SEC] would force Didi into delisting [in New York],” says Bo Zhuang, a China economist at Loomis Sayles. Its decision to re-list in Hong Kong is a “very reasonable” outcome for investors, Zhuang says. On Thursday, the SEC announced that it had finalized a rule that would force Chinese companies like Didi to hand over more financial data to regulators or face the prospect of being delisted on U.S. exchanges within three years.

Zhuang says Didi’s move may reassure institutional investors like SoftBank who will have few qualms about transferring their investments to Hong Kong.

In moving the listing, Didi said Friday that it would ensure that its American depositary shares (ADSs) will be “convertible into freely tradable shares” once it has re-listed on “another exchange,” presumably Hong Kong. ADSs are financial instruments that allow U.S. investors to own shares in a foreign company like Didi, and the Hong Kong stock exchange has previously allowed U.S. investors to exchange ADSs for Hong Kong shares following past U.S. delistings.

The timetable for Didi’s delisting in New York remains unclear, and Didi said that it will hold a shareholder meeting at “an appropriate time in the future” to vote on how to proceed. The Financial Times notes that the delisting will become less complicated at the end of this month, when Didi executives and the vast majority of shareholders are released from a six-month prohibition on selling shares.

Shares of the Beijing-based firm have struggled in New York. Didi reported in its 2021 IPO prospectus that it has 493 million annual users and that the firm was responsible for 88% of all ride-hailing trips booked in China as of last year. But China’s regulatory crackdown in recent months has threatened its ability to add customers and jeopardized its dominant position in China’s market. Beijing’s moves, combined with the prospect of U.S. scrutiny, have begun to spook investors.

Since raising $4.4 billion in its June IPO at a valuation of $73 billion, Didi’s share price has dropped by 45%, and the firm’s market capitalization has sunk to $37.6 billion. At the same time, it hasn’t released traditional quarterly reports that would give investors a view of whether Beijing’s measures have taken a toll on its financial performance.

Didi’s decision to move to Hong Kong isn’t a matter of poor stock performance; rather, it’s the result of pressure from the Chinese government. Earlier this week, China’s powerful Cyberspace Administration of China (CAC) reportedly asked Didi to draw up plans to delist from the New York Stock Exchange over data concerns, the culmination of months of negotiations between the tech giant and Chinese regulators that started before Didi went public.

In April, Didi sought to list in the U.S., saying it wanted to raise foreign capital to fuel aggressive expansion plans into overseas markets and invest in new technologies like artificial intelligence. But prior to its New York IPO on June 30, China’s government warned the company about going public before ensuring it had complied with Beijing’s new data regulations. Didi went ahead with its IPO anyway. Two days later, the CAC launched a probe into Didi, wary that the massive trove of data the firm has collected on its platform would fall into the hands of U.S. regulators. In the following weeks, the CAC ordered Didi to stop registering new users and told app stores to remove Didi’s apps, citing national security concerns.

Didi has sensitive data and has been “quite insensitive with it,” says Zhuang.

In 2015, Didi published a report about the productivity of various government ministries, showing how travel activity to and from government offices reflected how hard officials appeared to be working. Beijing worries that the U.S. government could use such data to gather information on Chinese officials, Zhuang says. For its part, Didi has said all of its user data is stored in China.

“There is no possibility to hand [Didi’s data] to the U.S.,” Didi vice president Li Min told state-owned media outlet the Global Times this summer.

More broadly, Didi’s New York delisting may signal an official end to U.S. markets serving as a firehose of capital for buzzy Chinese tech firms.

“It is becoming clear that after two decades of Chinese companies tapping the U.S. market for capital, and U.S. investors faring pretty well, the symbiotic relationship appears to be coming to an end,” Michael O’Rourke, chief market strategist at JonesTrading, wrote in a note to Fortune. “We suspect most of the Chinese companies will seek to pursue the eventual delisting by converting U.S. shares to a Hong Kong listing.”  

But Didi’s choice to move to Hong Kong also raises questions about the city’s relative independence from Beijing, a key factor in Hong Kong’s attractiveness as a global financial hub. In recent years, Beijing has dismantled Hong Kong’s relative political autonomy by imposing a vaguely worded national security law aimed at quashing dissent and restoring stability to a city that had been engulfed in pro-democracy protests.

City officials and regulators have claimed the law is limited in scope while also saying that banks and other institutions must comply with its mandates.

“Beijing now thinks [Hong Kong markets] are under [its] control. That’s why they allow more companies to be listed in Hong Kong,” says Zhuang.

Didi’s move to Hong Kong may also help accomplish another one of Beijing’s goals—decreasing its reliance on U.S. stock markets while building up what it considers a homegrown rival.

“If China can build up Hong Kong to be to be an alternative or competitor to New York, that would be really helpful for China as well,” Zhuang says.