With DiDi Global (NYSE:DIDI) in the crosshairs of the Chinese government, there is a significant chance that the company’s business will be crippled or even shut down. At the very least, Didi’s growth is likely to be meaningfully hindered for a very long time. As a result of these points, I strongly urge investors to sell DIDI stock, and I see the name as a good target for short-sellers.

Didi, operator of China’s largest ride-hailing app, earlier this month was accused by regulators of violating laws involving the collection and use of consumers’ data.

Beijing forced the company to stop enrolling new customers and made the nation’s app stores delete the firm’s app. Moreover, the government sent personnel to Didi’s facilities, allegedly to carry out “cybersecurity reviews.”

Personally, I doubt whether Beijing’s crackdown on Didi is in any way connected with cybersecurity. It’s very difficult for me to believe that a regime that continuously and harshly undermines its citizens’ liberty and privacy would be worried about a company obtaining or misusing their personal information. Plus, totalitarian governments are not exactly known for always telling the truth.

More likely is a different explanation some have floated: the Chinese government wants to stop tech companies from listing their shares overseas.

But I think the explanation probably goes even deeper than that.

After Alibaba (NYSE:BABA) founder Jack Ma blasted the country’s financial system in a speech in November 2020, I believe that Beijing began worrying about the growing power of its largest tech companies.

After all, some of these companies now control hundreds of billions of dollars (the market capitalization of the NYSE shares of BABA stock is over $500 billion), and their wealth is only going to keep increasing.

With the huge amounts of money they have, the companies could wreak considerable havoc on China’s rulers. In theory, the large tech firms could, for example, find ways to override Beijing’s internet censorship system.

While it may sound far-fetched, it’s not entirely impossible for large tech firms, especially if they band together, to bankroll a successful revolution in China.

After Ma’s speech, China took multiple steps against Alibaba. Now it’s cracking down on a number of tech companies, and Beijing has decided to make an example of Didi. Perhaps one factor is Didi’s size. Even after its stock tumbled in the wake of Beijing’s sanctions, the market capitalization of Didi’s shares in New York is still $55 billion.

The Real Problem With DIDI Stock

China’s government largely has free reign to punish the country’s companies however it sees fit.

Unlike in the U.S., investors may not get months or even weeks of warning that a company is in danger. Beijing can act almost literally at the stroke of a pen.

For example, a government agency on Friday, July 2 suddenly ordered Didi to stop enrolling new users. Two days later, it ordered all app stores to get rid of Didi’s app.

Even more ominously for the owners of DIDI stock, on July 6, China’s central bank abruptly closed a “software maker over its suspected involvement in cryptocurrency trading.”

What’s more, a new “data security” law gives Chinese President  Xi Jinping the ability to close companies found to have been inappropriately dealing with “core state data.” So, since Didi has been charged with improperly handling citizens’ data, it could quickly and easily be shut down by the president.

The Bottom Line on DIDI Stock

Since Beijing is, at a minimum, using Didi to set an example to other tech firms, the government could take many additional, drastic steps against it.

One thing that’s very unlikely to happen anytime soon, however, is any backtracking by China’s rulers. They took these measures against Didi for a reason that they consider to be very important, so they probably won’t quickly rescind them.

Given the still-high market capitalization of DIDI stock, it can drop a long way from its current level.

In light of these points, investors should sell DIDI stock, and risk-tolerant investors can consider using a small amount to short the shares.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.