Thursday, December 09, 2021

[WSJ] Hong Kong Listing Means More Trouble for Didi

'National Security' laws allow Beijing to operate with impunity, free from foreign regulatory scrutiny. 

By Dennis Kwok and Charles Mok

The announcement that Didi Chuxing, China’s leading ride-hailing company, intends to delist its shares from the New York Stock Exchange sent shock waves through the global financial markets and investment community. Didi’s plan is to relist on the Hong Kong Stock Exchange, allowing investors who bought shares on the NYSE to swap them for shares if and when there is a Hong Kong listing.

Less than six months ago, Didi raised billions of dollars from U.S. pension funds and international investors in a much-hyped initial public offering in New York. Yet on July 2, soon after the New York listing, Beijing’s Cyber Administration announced an investigation into Didi for potential violations of the country’s Data Security Law.

Under Chinese security laws, the definition of national security is broad and vague. The laws purport to cover all key industries, culture, infrastructure, cybersecurity and data. Under Xi Jinping’s leadership, the country is increasingly obsessed with national security. Even a film or a children’s textbook could be a threat to national security.

Adopted in June 2021, the Data Security Law covers pretty much anything. This new layer of regulatory control, when combined with the Cybersecurity Law and the Personal Information Protection Law, makes it almost impossible for any company, domestic or international, to comply fully with Chinese legal requirements.

Mr. Xi and other leaders in Beijing have long expressed the need for cybersecurity, data localization and control. In public speeches in 2016 and in 2018, Mr. Xi repeatedly stressed the need for the Chinese state to strengthen cybersecurity and data security, and urged all officials to grasp firmly the opportunities brought about by “informatization,” meaning the centralization and harnessing of data. Mr. Xi saw the lack of control in these areas as a threat to national security. To allow foreign regulators access to the data held by Didi presents an unacceptable risk.

These legal and regulatory risks won’t disappear simply by relisting in Hong Kong. The Hong Kong National Security Law also doesn’t clearly define “national security.” When Hong Kong’s chief secretary outlined the scope of national security in an article published in April, it was as wide as on the mainland.

The Cyber Administration in Beijing recently added a new requirement for listings in Hong Kong. All companies must satisfy a cybersecurity review if they “affect or may affect national security.” Listing in Hong Kong means Beijing could readily enforce its laws and regulations over Chinese companies while avoiding scrutiny by foreign regulators. Last week, the U.S. Securities and Exchange Commission mandated that all Chinese companies listed on U.S. exchanges disclose their ownership or control by any government entities.

The complex web of Chinese laws and regulations allows Beijing to operate with impunity, since it can find a violation by almost any company. This is in addition to the legal risks surrounding the structure known as the variable-interest entity. The National Security Law in Hong Kong imposes a legal duty on all organizations and individuals to “safeguard national security.” This includes the Hong Kong Stock Exchange and securities regulators such as the Securities and Futures Commission. Even if Hong Kong regulators give their green light for Didi to relist, nothing prevents the authorities from future crackdowns in the name of national security.

“Fool me once, shame on you. Fool me twice, shame on me.” Didi has no choice, but the international investment community should think twice before getting fooled again.

Mr. Kwok is a senior fellow at the Harvard Kennedy School’s Ash Center. Mr. Mok is founder and director of Tech for Good Asia. Both served as members of the Hong Kong Legislative Council, 2012-20.

Published: The Wall Street Journal, Dec 8 2022


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