The Chinese government’s investigation of DiDi Global Inc - ADR (DIDI) is reportedly coming to an end as soon as this week. DiDi soared 36.21% Monday to $2.52 per share.
While the swing higher Monday was great, it pales in comparison to the dramatic fall a year ago when the probe began. DiDi was at highs around $18 per share last June, putting them 85.79% from the high as of writing.
What Was the Probe About?
DiDi was the largest Chinese IPO on an American exchange and it raised $4.4 billion upon registering on the NYSE. At that time, DiDi had a market cap of $68 billion.
However, shortly after the foreign listing, China began a probe into DiDi and other foreign-listed Chinese company. This was due to alleged security concerns regarding foreign interest in the companies and the information on Chinese citizens held by the company.
With DiDi dealing with sensitive Chinese citizen data, they became an easy target under this agenda. Also probed were Alibaba (BABA), Tencent Music (TME), U.S. -listed Chinese education stocks, Meituan (MPNGY), and others.
Throughout all of these, China acted with complete disregard for the foreign investors.
The Unknown, Known
In the stock market, there is nothing quite as calming as when the unknown becomes known.
Looking ahead at what the conclusion holds, we don’t really know what to expect. The Alibaba probe ended with a record fine - but that was ultimately a good thing since it meant that the unknown was finally known, so Alibaba surged.
As the conclusion drags out, volatility is rising as investors become increasingly uneasy about not knowing what to expect. Regardless of a record fine, investors finally can sigh as they put the waiting game behind them.
What we know for sure is that DiDi should be allowed to resume having an app on domestic mobile app stores. Effectively, it can finally add users and drivers again and end its term in purgatory.
End of an Era?
Unlikely.
While the sentiment towards Chinese stocks may improve following the conclusion of this and other probes, the “conclusion” could be a bit more of a cliffhanger than real one.
In the words of the Wall Street Journal, amid concerns about the “rapid deterioration in China’s economic outlook, Beijing has moved to pause its campaign to tighten its grip on homegrown tech giants and their troves of data.”
While the economy was good, China had no issue with bringing these companies to their knees. But now that the economy is not good, the country is left having to boost investability by getting out of its own way.
With the World Bank cutting global economic growth forecasts to 2.9% and warning that high inflation and low growth may lie ahead, these companies could find themselves, now, after falling 90%, in a more bullish light as people might not expect China to intervene with growth during a period of weak outlook.
So, while Tom Brady leaving the Patriots marked the end of the Belichick-Brady era, it was only a continuation of the Brady Era. This may mark the end of the Covid-era tech clampdowns but it says nothing of future regulatory risks.
With this being described as being “paused” and not “terminated” or “concluded”, it feels like China is simply hitting the snooze button on self-imposed volatility because global uncertainties out of Beijing’s control have weighed heavily on the nation’s markets.
So, while Chinese stocks may look, feel, and even be bullish on this news, it's important to remember the immense regulatory risks that Chinese companies face due to swift rule changes remain. They may climb out of the realm of “uninvestable” but that doesn’t mean they found long-lasting stability.
