The Trans-Pacific tech spat is potentially quite close to the wallets of GCC investors
If you live in the Middle East, you may think that the Pacific Ocean is far away. Please, think again.
The standoff between the US and China over which companies and under what circumstances they can be listed in the US has just ratcheted up, leaving ripple effects beyond those two countries.
The market for Chinese tech IPOs on Wall Street threatens to become unstuck by regulatory announcements and sanctions from both sides.
It all started when then President Donald Trump threatened that Chinese companies listed in the US needed to open their audited books to regulators or face delisting from US exchanges. While understandable from the point of view of US regulators, this maxim contradicts US laws.
On the other side of the Pacific, the Chinese government has become increasingly concerned about the power, concentration, and financial might in the hands of individual tech entrepreneurs, as well as the stability of the financial system. The Chinese government had forced Ant’s parent Alibaba to pull the IPO from overseas listings. Ant Group is a fintech behemoth providing a wide range of business applications ranging from payment services over banking and wealth management to insurance.
The most recent twist was that the Chinese government has become concerned about its citizens’ data leaving the country and the national security implications.
So far, the dissonance on both sides has come at the expense of a $2.1 trillion IPO market for Chinese companies on Wall Street.
As of last week, companies holding the data of more than a million users will require permission from the Cyberspace Administration of China, the country’s regulator for all things related to data, the internet and cybersecurity, if they want to list on an overseas stock exchange.
So far, the dissonance on both sides has come at the expense of a $2.1 trillion IPO market for Chinese companies on Wall Street. The ride-hailing app Didi listed on Wall Street earlier this month in what was the second largest Chinese IPO in the US, netting $4.4 billion.
Since the clampdown, the company’s ADRs (American Depositary Receipts) have lost more than 20 percent of their shares trading below the IPO price.
The question is what this has to do with Gulf Cooperation Council (GCC) countries and their investors.
Firstly, when the two largest economies of the world are at odds there is always a fallout permeating through international markets.
Secondly, the GCC is the home of large-scale institutional investors, sovereign wealth funds, and affluent retail investors who invest their dollars, riyals or dirhams internationally, continuously seeking new opportunities, of which US ADRs of Chinese companies are one.
Thirdly, the pandemic has shown us two things. The tech sector, meaning companies like Alibaba, Ant, Tencent or Didi or their US counterparts, are precisely where the sweet spot is for international investors seeking both growth and value. The pandemic has also proven that the Chinese economy was resilient and has become one of, if not the, growth engine of the global economy.
Putting things into context with respect to a low yielding and risky investment environment, it is these sorts of companies which are exactly where investors seeking value would like to put their incremental dollars.
Given the relatively secure regulatory environment in the US, ADRs of Chinese growth companies constituted a sweet spot for international investors. Institutional investors from the GCC and the region's sovereign wealth funds are prime candidates to put their dollars into this asset class.
Alas, while these investors seek growth and value, they are not willing to bet their institutions’ disposable funds on a whimsy.
Therefore the fact that a $2.1 trillion market, which was hitherto deemed relatively secure and has turned iffy overnight, does matter to this class of GCC investors. It leaves them to look for other opportunities which can achieve yield without betting the bank.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.