July 7, 2021

By Stephen Culp and Medha Singh

(Reuters) -Shares of Didi Global Inc extended their slide on Wednesday in the wake of China ordering the app to be removed from mobile app stores as part of a broader crackdown on China-based companies with overseas listings.

In its fifth day of trading as a U.S.-listed company, the stock was last down 5.1%, about 29% below its $16.65 offer price.

On Tuesday, extending its actions beyond the tech sector, Beijing also said it would step up supervision of Chinese companies listed offshore in order to crack down on illegal activity and punish fraudulent securities issuance.

Beijing’s crackdown continued on Wednesday with fines issued to internet companies including Didi, Tencent Holdings Ltd and Alibaba Group Holding Ltd for failing to report earlier merger and acquisition deals for approval.

U.S.-listed shares of Alibaba and Tencent Music Entertainment Group were last off 1.1% and 2.5%, respectively.

Including Didi, the largest U.S. listing by a Chinese company since 2014, a record $12.5 billion has been raised so far in 2021 from Chinese firms listing in the United States, Refinitiv data shows.

In a sign of nervousness among investors about Didi, index publisher FTSE Russell also warned that it would not include Didi’s shares in its global equity indexes if trading is halted in Wednesday’s session.

“For Didi, the situation is bleak, but for Chinese companies preparing to list in the U.S. it may be even bleaker,” said Samuel Indyk, senior analyst at uk.Investing.com.

“As the risk of investing in Chinese tech in the U.S. increases, the ability of Chinese tech firms to raise capital drops with it, making listings in the U.S. less attractive going forward.”

Republican U.S. Senator Marco Rubio last month had called for the U.S. Securities and Exchange Commission to block Didi’s IPO https://bit.ly/3hMI89E because China does not allow auditors to conduct the same oversight that other U.S.-listed companies face.

“Allowing Didi, an unaccountable company based in China, to list on the New York Stock Exchange was reckless and irresponsible,” he said on Wednesday. “Beijing’s recent crackdown on the company only further underscores the risks posed by Chinese companies to U.S. investors.”

Analytics firm S3 Partners warned of another surge in short-selling of U.S.-listed Chinese companies as a clampdown by Beijing drove a third straight day of selling of ride-hailing giant Didi.

Short interest in the group has fallen to $43.5 billion from $50.6 billion this year, while short interest as a percentage of float fell to 3.81% from 5.67%, reflecting a closing out of some positions that were in the red after a market rally in January and February, Ihor Dusaniwsky, S3’s managing director of predictive analytics, said in a report.

The shorts, bets that shares will fall in the future, however, are now in profit overall for the year, suggesting there is now space for hedge funds and other speculators to bet on more losses after the clampdown launched last week.

S3’s Dusaniwsky said the market should expect more short selling and a reduction of “short-covering” — market jargon for the closing of positions, normally those that are in the red.

Invesco Golden Dragon China ETF, which tracks U.S. exchange-listed companies that are headquartered in China, has lost a third of its value from its February high, meaning short sellers who bet against the index over that period should have profited.

(Reporting by Stephen Culp in New York, Medha Singh and Akanksha Rana in Bengaluru; Additional reporting by Michelle PriceEditing by Shounak Dasgupta and Lisa Shumaker)

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