With DiDi Reprieve, Is China Taking the Handbrake off the Tech Sector?

Key takeaways:

• Along with DiDi, logistics matching platform Full Truck Alliance and online recruitment company Kanzhun are also likely to be allowed to sign up new users 
• Some analysts expect the Chinese authorities to gradually relax tough regulation of tech companies in order to spur economic growth, removing the biggest uncertainty in the market

By Ken Lo

The policy makers in charge of steering China’s economy are shifting gears. After exerting intense regulatory pressure on the powerful tech sector, the authorities now look set to ease off the brakes to let the industry inject more fuel into the engine of growth.

Three companies are expected to be among the first beneficiaries of the policy shift, led by China’s answer to Uber, DiDi Global Inc. DIDI.

The Wall Street Journal reported on Monday that the Chinese regulator is about to end its year-long cybersecurity probe into the ride-matching service and lift a ban on the platform registering new users. The company’s mobile apps are expected to return to app stores in a week at the earliest. A “go” signal for DiDi is a major boost for an industry beset by regulatory uncertainties.

The report sent DiDi’s U.S. stock soaring by 65% early on Monday to $3.06, but the share dipped in the following days to $2.51 by the market close on Wednesday, still 36% higher than the price before the report of the impending reprieve.

That is still 82% lower than the $14 per share IPO price when the company listed on the New York Stock Exchange last June. DiDi’s market valuation has plunged dramatically from $73 billion to $13 billion during the same period.

Another two U.S.-listed tech companies were also reported to be getting permission to resume new user registrations, Full Truck Alliance YMM, which matches trucks with companies transporting goods around China, and Kanzhun BZ, a jobs platform operator. Although Full Truck Alliance said that it had not yet restarted registrations, its share price still rose 18% over three trading days. Kanzhun attracted even more investor enthusiasm, with its  share price shooting up 30% during the same period.

Tech stocks in state of euphoria

Relief for DiDi is seen as a softening in regulatory policy, following signals from policymakers of a more supportive stance towards the digital economy, which has been a key growth driver for China. But it remains to be seen how much China’s tech giants may benefit from a shifting policy trade-off between reining in the sector and powering economic recovery.

Still, since hearing about DiDi’s possible restart, investors have been hopeful that the regulatory burden on other tech stocks may also lift. The Hang Seng TECH Index in Hong Kong rose by around 10% in the first three trading days of the week, outpacing a 4.4% rise in the broader Hang Seng Index.

Last year the Chinese government cracked down hard on Chinese tech giants, citing a need to ramp up antitrust enforcement and curb what it regarded as irregular financial expansion. The first shot was fired in November 2020 with the sudden suspension of a planned dual listing in Hong Kong and Shanghai by Ant Group, the financial arm of Alibaba BABA.

Soon after, Alibaba was accused of abusing its market dominance to force merchants to commit to its platform to the exclusion of rival sites. The ecommerce giant was fined 18.23 billion yuan ($270 million). The online food delivery platform Meituan (3690.HK) was slapped with the same charge and was fined 3.44 billion yuan.

Reeling from this rapid succession of blows, tech stocks went into a tailspin. Share prices of Alibaba, Meituan and Tencent (700.HK) more than halved over the next year or so.

But it was not until June last year that the regulatory storm reached its peak, when DiDi went public in New York despite pressure from the Chinese authorities to hold off its IPO.

The company, with its huge troves of potentially sensitive digital information, became the target of an official cybersecurity probe.

As a result, its 25 apps were pulled from app stores in China. The company posted a net loss of 30.6 billion yuan in the third quarter and 49.33 billion yuan for the full year. The market even worried for a time that the crackdown could send DiDi crashing into bankruptcy as business growth stalled, deterring other Chinese tech companies from seeking overseas financing.

But the industry’s fortunes seem to be taking a turn for the better as the government eases its foot off the regulatory pedal. DiDi’s planned delisting from the New York Exchange was approved by its board on May 23 and the company is expected to speed up efforts to seek an IPO at the Hong Kong Stock Exchange after the investigation wraps up.

Other companies likely to reap benefits

Market-watchers had sensed a change of mood towards the tech sector after the Chinese economy, beset by urban lockdowns and supply chain problems, hit a rough patch in April. Comments from officials pointed towards a rethink of the industry crackdown as the government sought to stabilize the economy.

But while the market felt that further restrictions were unlikely, it had not regarded a relaxation of existing controls as a strong possibility, said independent stock commentator Kenny Wen.

However, the apparent green light for DiDi indicates the authorities might release the regulatory handbrake more broadly, which is undoubtedly good news for tech giants that were fined or otherwise punished.

Wen said the market had been factoring in negatives such as the protracted Ukraine conflict and the possibility of the U.S. Federal Reserve raising interest rates by 50 basis points at both of its next two policy board meetings. But on the upside, he said the market believes that the U.S. and China have reached an understanding in a standoff about disclosure requirements for U.S.-listed Chinese stocks, easing fears about Chinese companies being forced to delist from U.S. exchanges.

With a looming respite for DiDi and hopes for rising takeout orders at Meituan, battered tech stocks have enjoyed a fresh lease of life.

Francis Lun, the CEO of GEO Securities, believes that the end of the DiDi investigation shows the government is taking a more tolerant approach to the tech sector for the sake of the economy, after waves of regulation targeting corporate activities it felt were harmful to competition, security or other national interests. 

But he believes that the Hong Kong market should brace for more bumps in the road as performance will depend on the pace of economic opening in China and the impact of policies to strengthen the economy for a post-Covid recovery. 

Notably, tensions with the U.S. are likely to ease in some respects. U.S. Treasury Secretary Janet Yellen said this week that the Biden administration might reduce tariffs on Chinese goods in the coming weeks to ease inflationary pressures. Such a move would boost Chinese stocks listed in New York and Hong Kong, adding more fuel to a rally in Chinese tech stocks.