China is cracking down on its own tech giants, but Apple and the US IPO market could pay the price

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When Chinese authorities quickly shut down one of the country’s most popular apps in an antitrust drive, there were immediate devastating consequences for Chinese companies already trading in the United States, but the long-term repercussions of the move could upset the US IPO market, as well as American tech giants. Like Apple Inc.

This is the collateral damage in the cross-border struggle between the United States and China over technology. The two countries have been grappling with each other for technological advancement for years, at the same time they have been challenging the growing power of local tech giants in different ways in recent years.

The latest move by officials in Beijing was dramatic, preventing new users from downloading the popular Didi Global Inc. app. DIDI, -5.88% – The Chinese version of Uber Technologies Inc. UBER, -2.32% – Just two days after the company launched its initial public offering in the United States. Chinese regulators told the company to delay the IPO, according to a Wall Street Journal report, but Didi shares debuted on June 30, dropping 20% ​​in trading on Tuesday and another 4% on Wednesday after the news broke.

China is also investigating Kanzhun Ltd. BZ, owner of an online recruitment platform, and Full Truck Alliance Co., Ltd. YMM, a trucking startup that’s similar to Uber. Both companies were recently listed in the United States.

The effects were immediate for Chinese companies listed in the United States, where stocks have fallen sharply with heavy valuations in recent years – such as Alibaba Group Holding Ltd. BABA, -3.92%, and iQiyi Inc. IQ, -3.93% – fell sharply with Didi. But experts said the repercussions could be felt more broadly, as tech companies like Apple’s -0.92% AAPL trying to do business in China face a new reality, and the US IPO market faces losing a significant portion of its pipeline.

“The real story here has little to do with the impact on the US market,” Harry Brodman, managing director at Berkeley Research Group LLC, told MarketWatch. “It’s directly present in the Chinese market – certainly for Chinese tech companies there, but perhaps also for American tech companies operating there.”

Apple has taken 15% to 20% of its total twelve-digit annual revenue from Greater China in recent years, but with growing criticism. During Apple’s antitrust lawsuit with Epic Games Inc. Epic’s lawyer sparked an investigation in the New York Times that concluded that Apple and its CEO, Tim Cook, had offered personal information to individuals in order to obtain service in China.

“Governments have the right to make laws for their citizens. We have to comply with the laws in the jurisdictions in which we operate,” Cook replied.

See: The increasingly complex relationship between Apple and China

Economists say Apple’s conflicting case in China highlights the rising concerns of US tech companies that deal in data as they pursue business in China, home to the world’s second-largest economy and most populous. Paul Zarwin, professor of accounting at New York University’s Stern School of Business, sees what is happening as a referendum on any technology company doing business in China.

“China is getting more inclusive. No matter where it is listed, it almost doesn’t matter in terms of control in China,” Zarwin told MarketWatch. “Apple AAPL, -0.92% has broken its principles of doing business in China to please the government there. It does 20% of its business in China. Anyone who wants to do business there has to sell their soul.”

The consequences for the US IPO market, investors and potential Chinese tech companies could be worrying. Chinese companies have raised more than $26 billion in the US IPO market in the past year and a half, according to Dealogic — $13.6 billion in 2020 and $12.6 billion already this year — and more than 30 companies based in China and Hong Kong so. The list is in the United States for the rest of this year, according to data compiled by Bloomberg.

Read also: The story of the two billion dollars of Chinese IPOs heading in completely different directions

Chinese medical data set LinkDoc Technology LDOC, backed by Alibaba Health Information, appears to be the first victim on that impending list of Beijing’s crackdown on foreign listings. The company was due to price its deal on Thursday, but it postponed its plans, according to Nikkei, citing two people familiar with the deal.

“The Chinese tend to companies like Didi for not going public. Didi was a warning to other companies,” James Lewis, senior vice president at the Center for Strategic and International Studies, told MarketWatch.

Although the Chinese are loath to admit it, their actions copy US policy. The Trump administration has threatened to restrict Chinese companies’ access to financial markets; Lewis said the Chinese were trying to “force people to buy Chinese instead of going somewhere else”.

More: Didi disaster angers lawmakers seeking to ban US investors from trading Chinese stocks

China’s strong-arm tactics reflect the Trump administration’s attempt to force Chinese telecom companies to delist from US public markets, emphasizing tightening policies around data control and privacy by the Chinese government amid a broader crackdown on technology companies. Last week, the China Cyberspace Administration (CAC) called on Didi to stop accepting new user registrations. Widespread regulatory pressure on Chinese tech companies began late last year with a $37 billion delisting planned by Ant Group, one of Alibaba’s fintech companies.

Meanwhile, Chinese regulators are considering a change that would require companies that use a variable-interest entity structure – Alibaba and Tencent Holdings Ltd. 700, +1.99%, and JD.com Inc. JD, -2.49% Employed to avoid Chinese restrictions on foreigners Property, capital and currency controls – to get Beijing’s approval before listing in the US, Hong Kong or elsewhere.

Meanwhile, Chinese companies face intense pressure inside the US On Wednesday, Senator Marco Rubio, Florida, who last month called on the Securities and Exchange Commission to block Didi’s initial public offering, said it was “reckless and irresponsible” that Didi was allowed to sell Stocks in New York. In May, Rubio introduced a law that would ban the listing of Chinese companies in the United States due to compliance with US regulators.

Critics point out that the government encouraged Chinese tech companies to grow at all costs, but when few giants – Baidu Inc. BIDU, -3.74%, larger Alibaba and Tencent, better known to some investors by the acronym BAT – Regulators became too big as competition and innovation were shed, and regulators stepped in. (BAT expanded its vice-like grip on digital advertising, to 67% in 2018, from 61% in 2015, according to consulting firm TS Lombard.) Something very similar is playing out in the United States, where the Obama administration has been a Silicon Valley wildebeest as the Big Five – Apple, Amazon.com Inc. AMZN, +0.94%, Google’s parent company Alphabet Inc. GOOGL, -1.13% GOOG, -0.69%, Microsoft Corp. MSFT, -0.90%, and Facebook Inc. FB, -1.38% – All went strong, leading to antitrust scrutiny by the Trump and Biden administrations, along with states.

“The Chinese government has been doing what regulators in the United States and the European Union have been doing for years,” Yunot Ciobotaro, Verve Group’s chief product officer, told MarketWatch. “Although they have government oversight, they want to make sure that this is not the case for tech companies. It could also be that they want to keep these unicorns in check, like blocking the AliPay IPO.”

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