Breakingviews - Beijing may cull a stateside unicorn stampede

Sarah Tang wears a unicorn head piece as she dances during the Burning Man 2015 "Carnival of Mirrors" arts and music festival in the Black Rock Desert of Nevada, September 5, 2015. Approximately 70,000 people have come to the sold-out festival that ends Sunday evening. REUTERS/Jim Urquhart

HONG KONG (Reuters Breakingviews) - A bitcoin miner, flying-taxi maker and apartment-sharing outfit are among the herd of Chinese upstarts rushing to New York markets. Their untested business models are alarming enough. But Beijing’s more frequent crackdowns on booming next-generation industries add another layer of risk.

Chinese firms have raised just $3 billion from American exchanges so far this year, less than a third of the 2018 total. In the last week of October, however, half a dozen companies filed for initial public offerings in New York, bringing the total backlog of Chinese floats to 24, according to data from Refinitiv. Rising trade uncertainties, tougher listing requirements on the NASDAQ and an upcoming U.S. presidential election have sparked fears that 2020 may prove even more volatile for debutants.

For investors, it’s a chance to bet on young, cutting-edge outfits. Risk factors listed in their IPO documents, though, will make even ousted WeWork boss Adam Neumann blush – not least, the long arm of Chinese regulators.

Canaan, the world’s second-biggest maker of hardware used to mine bitcoin and other cryptocurrencies, is aiming to raise $400 million stateside. It acknowledges, though, that bitcoin mining may be banned altogether in China, which accounts for nearly 90% of total sales. Likewise, Ehang, another IPO hopeful, is navigating a tangle of ever-changing requirements and approvals for its flying taxis and drones.

Even Ant Financial-backed Phoenix Tree risks attracting the ire of regulators. The company operates a WeWork-style service of sub-leasing shared apartments, and gives its tenants an option of taking out a loan from a bank to cover the rent. Phoenix Tree, which pays the interest, gets cash upfront, while the tenant repays the bank directly. This has helped the four-year-old upstart to expand: as of September, the company had amassed $435 million of upfront payments. Yet in filings it tells prospective investors it can’t guarantee this practice “will not be challenged” by authorities.

Beijing’s track record is not reassuring. It has frequently allowed new business to flourish before judging them problematic, and shutting them down. A crackdown on peer-to-peer lending, for example, has led to thousands of companies folding. In education, video games, online pharmacies and most recently, electronic cigarettes, officials are clamping down too. A unicorn cull may be overdue.


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