Will Beijing’s crackdown on Didi sour global investors on China tech stocks?

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U.S. investors will return from Fourth of July festivities this morning newly sobered by the perils of investing in U.S.-listed Chinese tech stocks.

On Friday, as Americans prepared to decamp for the holiday, China’s Internet regulator blindsided Wall Street with the news that Chinese ride-hailing giant Didi Chuxing was under investigation because of data privacy and national security concerns. On Sunday, the regulator, the Cyberspace Administration of China (CAC), ordered the removal of Didi’s app from Chinese app stores.

Friday’s move stunned global investors—and sent shares of Didi Global, the name the company trades under on the New York Stock Exchange, tumbling more than 5%. Didi had listed on the exchange only two days prior, raising $4.4 billion; it is Wall Street’s biggest stock sale for a Chinese company since Alibaba Group’s debut in 2014.

There was more carnage Monday as the CAC announced it was broadening its investigation to include two more companies—Boss Zhipin, an online recruitment company, and Full Truck Alliance, the operator of two leading truck-hailing platforms—also on suspicion of data privacy and national security violations. Those companies, like Didi, listed in New York in June, raising $912 million and $1.6 billion respectively.

The CAC’s regulatory blitz sent shock waves through Asian markets Monday and Tuesday, battering the shares of Didi’s biggest investors—including Japan’s SoftBank Group, and Chinese tech giants Alibaba Group and Tencent Holdings—and dragging down Chinese tech companies traded in Hong Kong.

Wall Street was already wary of China’s tech sector thanks to Xi Jinping’s November decision to throttle the $35 billion IPO of Ant Group, the digital payments giant controlled by billionaire Jack Ma. Beijing ratcheted up pressure this year with a flurry of antitrust actions against a score of other leading Chinese Internet companies. By last month, a few brave analysts were predicting that Beijing’s “tech rectification” campaign had run its course.

But the CAC’s moves against Didi suggest Beijing’s clampdown on China’s freewheeling tech sector is just getting started—and may be taking an even harder line. What’s new about the investigations announced over the past week is the focus on data privacy and national security breaches, which could result in far more severe punishments than earlier reviews targeting anti-trust violations.

At the very least, as the New York Times‘ Raymond Zhong puts it, the CAC’s latest inquiries “send a stark message to Chinese businesses about the government’s authority over them, even if they operate globally and their stock trades overseas.”

But they send an equally stark message to global investors: investing in Chinese tech companies is risky business, even (and perhaps especially) when those shares are underwritten by global investment banks and traded on U.S. exchanges.

As the Financial Times points out, while 34 Chinese companies have raised $12.4 billion in New York floats in the first half of this year, about 70% now trade below their IPO price. That’s made $460 million in fees for investment banks like Goldman Sachs and Morgan Stanley—at the expense of investors.

What’s less clear about the crackdown on Didi is the motive behind it. One theory, perhaps the most benign, is that regulators are whacking the company for forgetting its place. The Wall Street Journal‘s Lingling Wei and Keith Zhai report that weeks before Didi’s IPO, the cybersecurity watchdog warned it to delay listing to conduct its own cybersecurity review. Didi, in a statement to Reuters, says it received no such warning.

But why would the CAC worry about privacy and national security at Didi in the first place? The agency isn’t saying.

Didi, which boasts 377 million Chinese users and accounted for 88% of all ride-hailing trips in the fourth quarter of 2020, collects a vast trove of personal data. It’s also true that concerns about data privacy and protection are rising among China’s consumers, and that data and who has access to it has become a source of tension in the U.S.-China relationship.

The Times reports that Didi, in recent days, has scrambled to debunk rumors on Weibo, the Chinese social media platform, that it agreed to surrender user data to U.S. regulators as a condition of its New York listing. (Didi says it stores all its Chinese data on servers in China and has threatened to sue anyone who says otherwise.)

The Journal notes that, even if companies like Didi store data on servers inside China’s borders, the CAC fears that if firms purchase equipment from foreign vendors, those servers could be vulnerable to outside hackers. The Journal notes that, under Chinese law, transportation companies like Didi are counted as “critical infrastructure providers” and that geographic information and traffic data are deemed potentially sensitive.

A third explanation posits that Chinese regulators are deliberately penalizing Chinese tech companies seeking to raise capital on U.S. exchanges rather than those in Hong Kong, Shanghai or Shenzhen. Bloomberg, which notes that there are “as many as 34” pending filings for U.S. listings by Chinese firms this year, cites Hans Albrecht, a portfolio manager at Horizons ETFs Management Canada, as a proponent of that view. “The Didi situation reinforces the fact that China is annoyed by the flood of U.S. IPOs by Chinese tech companies, and is attempting to slow the reception of these IPOs in the West,” Albrecht says.

Whatever the true rationale, the Didi crackdown highlights the growing importance of data in the economic rivalry between the U.S. and China—and the dangers inherent in betting on China tech stocks.

More Eastworld news below.

Clay Chandler
-clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Eamon Barrett. Reach him at eamon.barrett@fortune.com.

EASTWORLD NEWS

Don’t doxx

The Singapore-based Asia Internet Coalition, a trade group representing U.S. behemoths including Facebook, Google, Amazon, Apple and others, warned that new “anti-doxxing” rules proposed by the Hong Kong government risks “freedom of expression and communication” online and that the companies concerned might have to stop providing services in the city in order to avoid falling afoul of the law. WSJ 

Soy Hong Kong

Some mainland Chinese consumers have called for a boycott of Hong Kong drinks maker Vitasoy, after a company representative sent an internal memo that offered condolences to the family of an employee who killed himself last week after stabbing a police officer. Hong Kong’s local police and government have labelled the assailant a “lone wolf” terrorist and have warned Hong Kong’s public against mourning him, likening displays of grief to advocating terrorism. Vitasoy’s critics say the company’s letter of condolence—which Vitasoy management denies approving—is also a tacit support of terrorism in Hong Kong. Vitasoy’s Hong Kong-listed shares closed down 11% Monday and remained there on Tuesday. Fortune

Hung up 

Leaders of the Burmese junta have reportedly forbidden foreign and local telecom executives from leaving the country. Reuters, which reported the story, has not been able to confirm the details, including a claim that the Junta gave telecom operators until July 5 to install spy software that would allow the military regime to monitor private calls, correspondence, and Internet browsing behavior. Protests against the junta’s coup on Feb. 1 continue in Myanmar and the country is now suffering from a spike in coronavirus cases. On Monday, the country reported close to 3,000 new cases although analysts believe the outbreak is far worse than reported due to the regime’s secretive nature and the current disruption to hospital services. Reuters

Phuket

Thailand Prime Minister Prayuth Chan-Ocha is self-isolating after coming into contact with a person who tested positive for COVID-19 during a “reopening” event in Phuket—the beach destination that Thailand reopened to international tourism on July 1. Prayuth has had two doses of AstraZeneca and has not tested positive for COVID-19, but the incident has highlighted the risks attached to Thailand’s reopening strategy, in which vaccinated tourists are permitted to enter Phuket without quarantining first. Bloomberg

MARKETS AND MOVERS

Long trade — The head of the Tokyo Stock exchange sees a “realistic” opportunity that trading hours on the bourse will be extended to 4 p.m. each weekday. Currently, Tokyo operates one of the world’s shortest trading days, with the bourse opening at 9 a.m. and closing at 3 p.m. Monday to Friday. 

Yahoo — Softbank said Monday that it had paid Verizon $1.6 billion for the rights to Yahoo branding and technology in Japan. Softbank already holds a license on Yahoo in Japan, but the new deal will secure those rights in perpetuity, as Verizon seeks to offload its media business.

Toshiba — The Tokyo Stock Exchange wants Toshiba to make a “prompt and appropriate” disclosure regarding the company’s widening governance scandal. Last month, an independent investigation concluded Toshiba had colluded with the government in order to put pressure on minority shareholders. Toshiba’s shares continue to trade on the TSE and have actually performed better since the report came out and the board ousted its chairman. 

Hyundai — South Korean carmaker Hyundai Motor has invested $100 million in battery start-up SolidEnergy Systems (SES). The U.S.-based SES makes solid-state fuel cells, which is a technology that Tesla has dismissed as unfeasible for commercial use, due to its cost and the technical challenges of creating the fuel cells. But other automakers, including Toyota, Volkswagen and now Hyundai, are investing in the tech that could produce batteries that are more stable and long-lasting than current “wet” batteries.

Suning — A government-led consortium of investors, including Alibaba, provided retailer Suning with a $1.36 billion bailout in exchange for a 17% equity stake. A hefty acquisition spree in 2016 left Suning heavily in debt but shares in the retailer surged 10% on news of the bailout. 

FINAL FIGURE

Over 400

China is expecting to send over 400 athletes to the Tokyo 2020 Olympics, which commence on July 23 this year. To date, 318 Chinese athletes have secured a place at the upcoming games, competing in 224 events across 30 different disciplines. In 2016, China sent 416 athletes to the Olympic games in Rio, which was the country’s largest-ever contingent of athletes sent to an overseas Olympics. The group competing this year is expected to be larger, but the nation’s basketball team won’t be part of it after falling to qualify just this week. The Tokyo games will be the first time China hasn’t sent a basketball team to the Olympics since 1984.