State intervention will be detrimental in the long term.
- Part of the remedies imposed by the Chinese regulator could be a move to effective state control and a delisting from the US which I continue to believe will do more harm to China’s technology ambitions than the USA will ever accomplish on its own.
- China’s regulators are annoyed with Didi because it went ahead with its US IPO despite the objections of the Cyberspace Administration of China which was seen as a challenge to the authority of the state which can not go unpunished.
- The result is a suspension of new user additions and an investigation into its data security practices and its treatment of its drivers.
- The latest possibility was for state-controlled entities to take an investment in Didi getting a board seat and what is known as a golden share.
- This means that the state would have a very small economic interest but the golden share confers the ability to veto any of the proposals that are made by the board.
- This is pretty much what has happened to ByteDance and has the effect of changing a private company into a state-controlled entity (SOE).
- However, this is not what has transpired as state-controlled entities have instead decided to invest in one of Didi’s rivals (Cao Cao Mobility) and presumably crush Didi from the outside.
- Cao Cao Mobility currently operates in 62 Chinese cities and has recently cut prices for riders and increased incentives for drivers in order to take share from Didi while it is mired in regulatory oversight and cannot add new users.
- This puts Didi at a huge disadvantage as the state now has a financial incentive to ensure that Didi can not compete and to see it drummed out of business.
- This opens up further brutal competition which until recently, Didi had pretty much put to bed.
- This will greatly hurt margins and probably cause Didi to need to bring down its forecasts in the short to medium term.
- Didi may also be forced to delist from the USA and either return to being private or move to Hong Kong and/or the mainland.
- In all likelihood would trigger a further avalanche of selling as US funds are forced to exit their positions at any price which would further curtail Didi’s access to capital.
- This is how China’s long-term ambitions are dented as Didi has aggressive global expansion plans for its business which have now all been put on ice due to the ongoing uncertainty.
- Furthermore, should Didi effectively become state-owned or influenced, there will be more resistance to Didi offering services abroad from countries worried that their citizens’ movement data will be in the hands of the Chinese state.
- This is just one example of how excessive regulation may very well impede China’s long-term ambitions of becoming a global superpower in the technology sector.
- Another example is gaming where draconian restrictions on game players mean that gaming innovation may move outside of China to countries where there are no restrictions and the returns on developing games will be higher (see here).
- I continue to think that Tencent remains the Chinese company most at risk from regulation because of its large and thriving financial services business.
- If this is decimated in the same way that Ant Group has been, then there will almost certainly be a further large correction in Tencent’s valuation.
- I think that this is a matter of when not if because control of money is far important to maintaining power in China than the gaming sector is and digital financial services like Tencent’s represent a direct challenge to the financial status-quo of the state-owned banks.
- This is why China hates cryptocurrencies because they are decentralised and represent monetary units (or speculative assets) that are independent of central bank control.
- This is by far the greatest risk that Tencent now faces and as a result, I don’t think we have seen the bottom of Tencent’s share price.
- I think the same is true for Didi and I would rather consider averaging down my already battered Alibaba position where I think the spectre of regulation has already passed and the share price has fallen way too far.
