BIG IDEA | ‘Does Beijing not care how much money foreign investors have lost? Does the government really want to close China Inc.’s access to the deep pool of global capital? The short answer is, no, the government doesn’t care.

'But it’s not that simple. Beijing is pursuing other goals.’

‘Whether you’re a bond or stock investor, chances are you’ve been burned by the Chinese government this year.’

• ‘For example, just days after DiDi Global Inc.raised $4.4 billion in a New York initial public offering, Beijing started an investigation over the ride-hailing giant’s data security practices. DiDi has lost about $29 billion in market value in less than a month.’
• ‘On July 23 there were official reports that Beijing was planning to force companies that offer school tutoring to turn into nonprofits. Gaotu Techedu, New Oriental Education & Technology Group, and TAL Education Group, some of the largest Chinese education companies traded in the U.S., lost more than half their value.’
• ‘On July 26, food delivery super-app Meituan learned of the Chinese government’s resolve to protect gig workers and promptly lost about $30 billion of market value.’

‘Does Beijing not care how much money foreign investors have lost? Does the government really want to close China Inc.’s access to the deep pool of global capital?

• ‘The short answer is, no, the government doesn’t care.’

‘But it’s not that simple. Beijing is pursuing other goals:’

• ‘reining in the power of its tech titans and boosting startups;’
• ‘protecting social equality; and’
• ‘making sure the cost of living in cities isn’t so high that families aren’t willing to have children.’

‘And Beijing is suspicious of companies that are skilled at raising capital overseas—beyond its watchful eye.’

• ‘There’s one practice it’s especially concerned about: a variable interest entity (VIE) corporate structure commonly deployed by the hottest unicorns.’
• ‘Often incorporated in the Cayman Islands, these startups raise capital and list their shares offshore.’
• ‘The money raised, in turn, gets pumped into China for business developments.’

‘Sometimes, China might feel it’s being hijacked by hot foreign money.’

• ‘For example, Beijing wanted to scale down investment in for-profit education as early as 2018, but venture capital kept pouring in.’
• ‘Now the lucrative bet has been called to a halt.’

‘Or consider geopolitical risks. Because of the VIE structure, in theory, DiDi, which is incorporated in the Cayman Islands, didn’t need Beijing’s approval to list in New York.’

• ‘But China’s cybersecurity office was concerned enough about DiDi’s data security—such as possible exposures to sensitive government locations—that it suggested the company postpone its IPO.’
• ‘DiDi ignored the warning, and we all know how it’s turning out.’

‘Beijing has made great efforts to instill discipline into its marketplace, and it wants to see more hot unicorns list and raise money on the mainland.’

• ‘Yet they continue favoring New York over Shenzhen, Hong Kong over Shanghai.’

‘So it’s not that China is antagonistic toward foreign money.’

• ‘It just wants to admonish those who seek loopholes abroad.’

‘And this is the new message: If you’re going to invest in China, you’ll have to do it through the capital markets it’s developing.’

• ‘That won’t only strengthen the domestic economy, it will also allow Beijing to make sure the capital goes to industries it wants to develop and stays away from areas it deems a threat to the common good.’