Not just Didi: China’s Internet watchdog targets more U.S.-listed firms for ‘national security’ review

July 5, 2021, 9:26 AM UTC

On Monday, China’s Internet watchdog, the Cyberspace Administration of China (CAC), ordered two Chinese-owned, U.S.-listed companies to stop registering new users. The agency placed both firms—Full Truck Alliance, known as China’s “Uber for trucks,” and job recruitment site Boss Zhipin, under national security review.

The freeze comes a day after the CAC imposed similar sanctions on ride-hailing giant Didi Chuxing, which raised $4.4 billion in a New York IPO last week. The CAC accused the firm of breaching data protection rules.

“Didi will fully cooperate with the relevant government authority during the review,” Didi said in a statement on Friday, when the CAC first announced Didi was under review as a possible threat to national security.

On Sunday, the CAC ordered local app stores to remove Didi’s app, flagging Didi Global’s use of consumer data for unspecified violations. Didi Global is the name of Didi Chuxing’s listed entity. Didi said it “expects that the app takedown may have an adverse impact on [the company’s] revenue in China.”

Shares in Didi plummeted 5.3% on Friday following the CAC’s announcement, wiping out some of the 16% gain they’d logged since debuting on Wednesday. With U.S. markets closed on Monday for Independence Day, the CAC’s Sunday update has yet to hit Didi stock.

Like Didi, Full Truck Alliance and Boss Zhipin are app-based, and both listed in the U.S. last month. Full Truck Alliance raised $1.56 billion on the NYSE, while Boss Zhipin’s listed parent company, Kanzhun, raised $912 million on the Nasdaq.

The CAC hasn’t publicly disclosed how the three targets might be violating national security, although the administrator’s concern appears to center on how each company stores and shares data.

On Friday, responding to online speculation about the CAC’s motive, Didi vice president Li Min said in a Weibo post that “Didi stores all domestic user data at servers in China, it is absolutely not possible to pass data to the United States.”

China passed its first-ever data security regime, called the Data Security Law, last month and will implement it on Sept. 1. The DSL gives Beijing the power to fine or shut down tech firms deemed non-compliant as a matter of national security.

The CAC probe also marks a new turning point in China’s Big Tech crackdown, whereby regulators are citing cyber and national security concerns as justification for added pressure. Previously, China’s State Administration for Market Regulation (SAMR) carried out investigations of tech firms by invoking competition and financial concerns, as seen with the probe into Alibaba’s Ant Group last year.

The CAC probe is a signal that the regulator “can and will enforce its cybersecurity laws,” says Michael Pang, managing director at consulting firm Protiviti. “It’s the most high-profile cybersecurity investigation to date. It serves as a reminder to companies, both domestic and foreign, that they should take cybersecurity regulation seriously.”

The CAC’s actions sent a chill across Chinese tech stocks on Monday. Hong Kong’s Hang Seng Tech Index sank 2.2% to a seven-week low of 7,712.

With the probes, Beijing is indicating that “business goals should be fully state-aligned,” said Kevin Francis Marcaida, research lead at equity research platform ChineseAlpha.

Didi’s temporary ban on new user sign-ups will likely be “relatively benign” for the company that already has 377 million active users in China, says Kirk Boodry, analyst at Redex Research who publishes on SmartKarma. The review could take between 30 and 45 days and “may turn up nothing,” he said. But the timing of the CAC’s investigation “seems strange… that it has kicked off with companies newly-listed in the U.S.,” says Boodry.

The U.S. perception is that Beijing has “cynically timed its regulatory blow to fall after Didi had sucked up U.S. investors’ cash,” said a Monday note by Gavekal Research. The timing of the CAC’s action against Didi will encourage the Securities and Exchange Commission to follow through on plans to force U.S.-listed Chinese firms to comply with auditing rules, the note says.

The review from the CAC is the second government probe into Didi’s operations in as many months.

In June, China’s antitrust regulator, the State Administration for Market Regulation (SAMR), reportedly launched an antitrust inquiry into Didi. Analysts suspect the investigation cooled investors’ interest in Didi, forcing it to target a lower valuation in its IPO last week. The offering gave Didi a market cap of $68 billion rather than the $100 billion it had hoped for weeks earlier.

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