A powerful agency that China’s President Xi Jinping set up to monitor the Internet during his first term in office is taking on a new role: regulating US-listed Chinese companies.
The Cyberspace Administration of China, under a central leadership group chaired by Mr. Xi, is taking a leading role in Beijing’s recently announced move to strengthen cross-agency oversight of overseas listed companies, particularly those traded in the United States and tighten the rules for future foreign listings, so knowledgeable people.
Behind the agency’s rising clout is a desire to address a lack of regulatory coordination that has enabled the kind of mixed messages that preceded ridesharing giant Didi Global Inc.’s blockbuster IPO last month.
While the cybersecurity regulator alerted Didi about her network security, people said that major economic and financial regulators largely supported Didi’s listing plan. Since he was not expressly asked to stop the planned sale of shares, Didi continued.
For future overseas stock sales, the cyber watchdog could potentially block a plan seen as a threat to Chinese security.
It also underscores Mr. Xi’s escalating efforts to control the private corporate sector – especially tech companies with tons of valuable data.
The increased involvement in corporate oversight by the cyberspace regulator, which is tasked with strengthening government control over digital information, could accelerate the decoupling of the financial markets in China and the US.
On the one hand, there are China’s regulators, led by the cyberspace agency, making it difficult for Chinese companies to sell stocks overseas. On the other hand, there are American lawmakers like Senator Marco Rubio (R., Fla.), Who are increasingly making demands to prevent Chinese companies from going public in the US unless they submit to the US examination requirements -American model.
In China, « the cyber regulator has become the new securities regulator, » says Victor Shih, a political economy professor at the University of California at San Diego who focuses on Chinese politics. « Investors and companies will find it a lot more difficult to manage the listing process. »
In the vast Chinese bureaucracy, the agency is a relative newcomer with a central mandate to Mr. Xi’s vision of making China a superpower, shielded from foreign interference or influence.
Mr. Xi founded the agency in 2014, two years after he came to power, to centralize and improve the country’s entire network and data security. In 2013, the leak of classified information from former CIA employee Edward Snowden through the US global surveillance program shocked the Chinese leadership to realize how easily information about Chinese citizens or companies can get into the wrong hands.
Since then, the cyberspace administration has been driving the formulation of laws and regulations aimed at strengthening state power over the flow of information. For example, a new data protection law was finalized in June – under the aegis of the authority – to give authorities more powers to get private companies to share data from social media, e-commerce, lending and other companies.
In essence, the law shows that such digital records are to be viewed as a national good that can be tapped or restricted according to the needs of the state.
Didi’s IPO is not the first time poor coordination between China’s regulators has caused missteps and undermined the global credibility of Beijing’s economic leadership. In 2015, a sell-off in the stock markets was exacerbated by a fragmented system in which the central bank and other financial regulators acted in isolation and sometimes even oppositely.
Didi’s American Depositary Shares have slumped since Beijing launched a cybersecurity investigation into the company’s overseas list just days after the share sale in the U.S. list.
Several class action lawsuits have been filed against Didi in the United States, accusing the company of misleading investors prior to going public. And many investors who bought Didi when it went public were confused or even angry about the sudden regulatory measures.
In an effort to strengthen regulations for foreign-listed companies, the public believes that the cybersecurity administration plays an active role in drafting provisions on information that is considered to be the core of national security and should therefore not be disclosed by companies to foreign regulators.
This could diverge the Chinese regulations even more from those of the US regulators and make it increasingly difficult for Chinese companies to comply with demands on both sides.
The US Securities and Exchange Commission has tried to gain better access to audits of Chinese companies, some of which have resisted, saying that China’s laws prohibit them from handing over audit papers to US regulators. Analysts say many Chinese companies could be removed from US markets as a result.
Meanwhile, the cyberspace administration is also working with China’s top securities regulator and other ministries to revise longstanding rules for so-called variable interest entities, people say. Such corporate structures, known as VIEs, have made it possible for foreign investors to buy into Chinese companies in technology and other sensitive sectors without directly owning voting shares in these companies.
It’s a structure shared by many Chinese tech giants – including e-commerce giant Alibaba Group Holding Ltd., conglomerate Tencent Holdings Ltd. and Didi – used when they first sell stocks abroad. Previous Chinese leaders saw it as an opportunity for Chinese companies to gain international repute, but the current leadership has increasingly disapproved of the model as fears that sensitive information might end up in foreign hands grows.
One option being considered by regulators is to require companies using the VIE structure to obtain regulatory approval before selling stocks in overseas markets, the people said. That could make it a more cumbersome process.
« That would be a major tightening of China’s securities regulations, » said Winston Ma, associate professor of law at New York University and author of The Digital War, a book about China’s growing technological capabilities. « Almost every US-listed Chinese company that foreign investors such as pension funds and foundations can buy is listed through a VIE structure. »
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