China is reportedly looking to impose a $1 billion fine on Didi, which is the market leader in the country’s ride-hailing industry. The company went public last year in the US but has now delisted under pressure from the Chinese government.
China was concerned about the security of its citizens’ data given Didi’s US listing. Chinese authorities also raised concerns that SoftBank and Uber, which are Didi’s top two stockholders, are non-Chinese entities.
China has built strict firewalls in the country’s internet and several US companies like Twitter and Facebook are not allowed in the country. It has home-grown alternatives for social media but these are strictly monitored and censored by the government.
Didi’s listing in the US was in trouble from the very beginning. The company had warned of the investigations in China in its IPO prospectus only. However, not many believed that the country would take the extreme step of delisting Didi from the US.
Didi delisted in June and now trades on the OTC markets. It is a penny stock now as the price is below $5, which is the SEC’s threshold for penny stocks. Didi’s delisting has hurt US investors as well as SoftBank and Uber. While SoftBank was the largest investor in the company, Uber assumed the stake after it sold its Chinese operations to Didi.
Uber also exited the food delivery business in India to Zomato and took a stake in the company in the process. The company has also exited the flying taxi and autonomous driving business as the focus has shifted to profitability.
Didi Could Face a Fine in China
The WSJ reported that Didi could face a $1 billion fine in China. The country has signaled that it is looking to end the tech crackdown that led to a crash in Chinese stocks in 2021. Cathie Wood of ARK Invest believes that there has been a structural derating of Chinese stocks after the crackdown.
Alibaba was among the worst affected by China’s tech crackdown. The company agreed to pay a record $2.8 billion fine to settle the anti-trust case but its woes are far from over. It is still waiting for a clearance for the IPO of Ant Financial which was curtailed in 2020. Ant would have surpassed Alibaba to become the largest Chinese listing and had attracted bids worth $3 trillion. The company’s valuation has since plunged and the IPO might come at a toned-down valuation if it gets a green signal from Chinese authorities.
Didi’s delisting from the US has nonetheless dampened sentiments towards Chinese stocks. It remains to be seen if Didi’s troubles in China would end after the fine.
Decoupling between US and China
The US has been trying to decouple from China and reduce its reliance on Chinese imports. The Senate is also moving forward on the $52 billion CHIPS (Creating Helpful Incentives to Produce Semiconductors for America) Act which would help increase chip production in the country and reduce the reliance on China. There is bipartisan support for the Act in Congress.
Coming back to Didi, markets would await more details on the fine. The country has sent signals though that it is not looking to crack down further amid the slowing economy. It also approved several video games earlier this year after a months-long freeze.
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