An Alternative Theory for China's Tech Crackdown

Is this the real reason China is cracking down on tech?

When Chinese authorities on Tuesday ordered ride-hailing service Didi Chuxing’s app removed from all Chinese app stores, they justified the move based on vague concerns about the company’s collection of user data. But there may be a more compelling explanation, not just for the Didi crackdown, but for China’s broader moves against bitcoin mining, its disciplining of Jack Ma and its efforts to build a heavily surveilled digital yuan.

David Z. Morris is CoinDesk's Chief Insights Columnist.

Shares in Hong Kong Exchanges and Clearing, which runs Hong Kong’s stock and futures exchanges, jumped more than 5% the day after the extent of the Didi crackdown became clear, a move highlighted this morning by Morning Brew. The Brew’s read is that this suggests investors foresee a major pullback of Chinese companies from U.S. or international stock markets. That would mean more initial public offerings and other equity trading in Chinese companies would go through Hong Kong markets.

China’s leaders haven’t stated this is a strategic goal, but there’s significant evidence for the theory. As I noted Tuesday, Chinese authorities warned Didi not to proceed with its IPO, but it went ahead anyway. Meanwhile, regulators in Beijing are aiming to change China’s securities laws to close the loophole that allowed Didi and others to list internationally, according to Bloomberg. (That revision would also reportedly limit listings in Hong Kong, so those two data points do seem somewhat contradictory.)

Since its action against Didi, Chinese authorities have also opened investigations into three other U.S.-listed tech companies over concerns of “national data security risks.” Those companies, like Didi, won’t be allowed to register new users during the review period, which could last up to 45 days.

That will likely be devastating for the businesses, and the actions could very well scare other Chinese tech companies away from listing internationally if the clampdown is seen as retaliation for going to Wall Street. The crackdown has also led to calls from U.S. legislators to impose more scrutiny on the listings of Chinese companies.

But why? The Didi case shows clearly how such limits could hurt Chinese companies. When it went public last week, Didi attracted $4.4 billion in capital on the New York Stock Exchange, presumably largely from non-Chinese investors (those investors are now suing Didi). Though Didi operates worldwide, a huge portion of that capital will certainly go to salaries and other expenditures within China, boosting not just one company, but the entire national economy. Restricting that international investment would make it harder for Chinese leaders to deliver on the continuing prosperity that cements their control.

That could be because Chinese enforcers are catering to the financial elite in Hong Kong at the expense of tech companies. The former British colonial outpost was long the gateway for financial flows between East Asia and the rest of the world. But crackdowns on political freedoms since Hong Kong’s return to Chinese control, and particularly in the past five years as Chinese President Xi Jinping consolidated power, has raised concerns that its financial sector could suffer. Keeping more deals flowing through Hong Kong could be an attempt to prop up the industry, and perhaps to demonstrate to bankers there – not all of whom are happy with Beijing’s rising control – which side their bread is buttered on.

The moves also seem to fit into the broader context of China’s program of financial surveillance and control. That program includes the continued development of a central bank digital currency that could be tightly monitored and controlled by China’s central bank, and the crackdown on Ant Group, which offered personal finance and payments tools to individuals. Constraining international stock listings could similarly help China maintain its policy of strict capital controls, which limit both foreign ownership of Chinese assets and the movement of Chinese funds outside the country’s borders.

All that said, it would be simplistic to read the crackdown as entirely about the Communist Party consolidating financial control.

The crackdown has also affected tech companies like Tencent, which is not listed abroad. The U.S. backlash to Chinese stock offerings was an unintended consequence, China specialist Jude Blanchette told CNBC. And in other financial realms, specifically commodity futures, China is trying to open its markets to foreign participation as a way to increase its global influence.

Those points support the idea that the latest wave of crackdowns is at least in part truly motivated by cybersecurity concerns. China’s moves, though far more aggressive, also broadly mirror recent efforts in the U.S. and Europe to enforce better data privacy standards on internet companies.

“We’re moving from almost no regulation [of the] internet [in China] to more regulation,” Chinese investor Qi Wang commented to CNBC. “Of course during this transition, the pressure may seem high because [of] the low base.”