The Chinese government is tightening its grip on the country's internet giants, coming down particularly hard on companies listed on the U.S. stock market. A broad swath of investors could be affected by the crackdown. China must stop using unclear rules to hobble web companies.
Chinese regulators on July 4 ordered Didi Global, the country's largest ride-hailing service, to remove its app from domestic app stores due to violations of laws on collecting and handling personal information. Didi had just listed on the New York Stock Exchange on June 30.
Suspending app distribution is a serious punishment that could threaten the company's continuity. Despite the severity of the penalty, Chinese authorities have not disclosed the details of the legal violations. The punishment was abruptly set two days after authorities announced they had begun investigating the company for reasons of national security.
China lacks transparency in the governance of internet businesses. Didi also has not provided sufficient information, saying only that it would "strive to rectify any problems."
Chinese authorities are conducting similar investigations into two other U.S.-listed internet companies. E-commerce giant Alibaba Group Holding was hit with a record fine for antitrust violations, and the listing of its financial subsidiary was postponed after government intervention. These measures stem from President Xi Jinping's move to tighten government control over China's major web companies.
Thanks to their expected growth, Chinese internet companies have raised massive funds from overseas investment companies and other businesses. SoftBank Group, a Singaporean sovereign wealth fund and Toyota Motor have all invested in Didi. The stock prices of these Chinese companies could suffer if Beijing continues to intervene without providing transparency, leading to global losses.
The Chinese government has a different legal system than Japan, the U.S. or Europe when it comes to protecting personal information, in that it requires private companies to cooperate in its intelligence operations. Beijing should recognize that tighter controls on internet companies could reduce the flow of funds from foreign investors.
The "China risk" is expected to keep growing as the conflict between Beijing and Washington continues. Investors need to be more cautious than ever about investing in Chinese companies.
The government is also tightening data regulations for foreign companies doing business in China. All high-tech companies that have moved into the country should note that they are exposed to the same risks as Didi.