China Inc braces for fallout from Didi data probe


Updates on Chinese Business and Finance

When Chinese regulators announced a data security investigation at Didi Chuxing last month, a fifth of the market value of the New York-listed rideshare group was immediately wiped out.

Beijing-based Didi, the entire Chinese tech industry and global investors are now ready for the results of the unprecedented investigation.

Neither the company nor the investigating regulatory agency, the Cyberspace Administration of China, have indicated what to expect. But analysts believed Beijing would use the Didi investigation to issue a warning: tech groups should prioritize domestic compliance over foreign investors.

“They’re trying to make a point: don’t do this. The last time they made a big point was with Alibaba, it was a record fine, ”said Kendra Schaefer, technical analyst at Beijing-based consultancy Trivium, referring to the antitrust penalty of 2. , $ 8 billion inflicted on Jack Ma’s e-commerce group in April.

“Beijing’s primary data goal is to make companies understand that data and network security compliance is absolutely critical to their continued development,” she said.

The investigation was announced on July 2, days after Didi’s initial public offering of $ 4.4 billion. Officials had up to 45 working days for their investigation.

Didi’s statements have since been limited to responding to media information: imminent changes in general management, third parties being called in for data management and that the company could even go private.

Didi called the reports’ claims “false and unfounded”.

Despite the denials, investors in the ridesharing group remained very concerned that it had already been asked to quit its listing on the New York Stock Exchange, two people familiar with the matter told the Financial Times.

Another person familiar with the investigation expected the Chinese government to take “golden action” in Didi, which would allow tighter state control in the future.

That outcome, the person said, had become more likely after a think tank operating under Chinese markets control released a discussion paper in April encouraging preferred stock in groups of critical importance to the public.

Didi refused to answer questions.

Even those closely involved with Didi’s IPO are looking for answers.

In New York City, lawyers have filed a class action lawsuit on behalf of Didi’s investors, alleging they were misled by the company and its executives about its past dealings with Chinese regulators.

Questions of whether Didi accurately disclosed the pressure she faced from ACC also led to scrutiny of the banks that have endorsed her listing, including Goldman Sachs and Morgan Stanley.

Didi and his banks received assurances from their legal advisor in China that “he was fully compliant,” said an executive at one of the Wall Street banks in charge of the process shortly after the fall in shares in China. carpool group last month.

For SoftBank, Didi’s largest shareholder with 20.1% of the capital, the survey could prove to be crucial in determining the future of the Japanese group’s investments in the Chinese technology sector.

SoftBank founder Masayoshi Son has said he will reduce investment in Chinese startups until the extent of Beijing’s regulatory crackdown becomes clear.

It is also hoped that the Didi probe will provide clues to the scope and depth of regulatory changes.

Schaefer said that while Beijing is often “quite lax” on the details, some “parts of the government are desperate to advise other companies to take voluntary steps to self-correct.”

Didi’s rivals and companies in other tech industries across China would be monitoring whether the rideshare group would be allowed to resume running its app normally, or whether Beijing would need a major overhaul.

At the start of last month, the company was ordered to remove its platform from Chinese app stores, while the ACC warned ahead of listing that the company’s mapping technology could expose sensitive locations, such as military bases.

Beijing was also expected to force Didi to reduce the commissions it takes from drivers, in line with guidelines from the Transport Ministry.

In an apparent effort to improve its image, Didi recently began showing videos of passengers touting the company’s “positive energy” for the company through newly installed flat screens in its rental cars in Beijing. The official Beijing Daily newspaper criticized the move as a potential safety hazard that was unpopular with drivers and passengers.

The uncertainty over the ultimate authority of regulators over the tech industry has been exacerbated by the presence of at least seven state bodies in the Didi investigation.

In addition to the CAC, officials from the Chinese spy agency, its ministries of natural resources and transport, as well as officials from the tax and police and the competition watchdog visited the headquarters. of the company.

“The big question mark for us was the tax office – which seemed incredibly unrelated,” Schaefer said. “Is it because they decided to build a tax review into this, or will the tax department be involved in cybersecurity reviews in the future?” “

The Didi investigation marked the first such cybersecurity review in China’s sweeping changes to data governance, which include tough new data privacy laws.

However, Samm Sacks, senior researcher at Yale Law School’s Paul Tsai China Center, warned that future investigative triggers and results could remain “a black box.”

The review is “a highly subjective tool that could be used by government as it sees fit when it needs to send a message or assert control over a business,” she said. “That’s what makes him so scary.”

Additional reporting by Sherry Fei Ju and Christian Shepherd in Beijing

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