By Scott Murdoch, Samuel Shen and Selena Li
SYDNEY/HONG KONG (Reuters) – New rules governing how Chinese companies can list outside of mainland China will often mean they receive a nod from multiple domestic government agencies, potentially resulting in a lengthy approval process, investment bankers say.
On the one hand, the rules provide clarity after Beijing’s regulatory action since mid-2021, which has slowed the US listings of Chinese companies to a trickle.
But where there used to be very few regulatory requirements before the crackdown, there are now more hurdles for companies to jump through. These problems, combined with tensions between the US and China over a variety of issues from suspected spy balloons to trade disputes, mean a rush by Chinese firms seeking IPOs in New York is unlikely.
“This is not exciting news because now you have to go through some additional complicated procedures,” said Guo Yi, chief operating officer at Univest Securities, a boutique investment bank that helps Chinese firms list in New York.
The long-awaited final rules, which come into effect on March 31, require companies wishing to list in markets such as the United States or Hong Kong to apply and obtain approval from the China Securities Regulatory Commission (CSRC). from other relevant regulatory authorities.
“Previously, all you had to worry about was setting up an offshore listing structure. Now you have to report everything,” Guo said.
Under the new rules, a variety of government agencies would participate in approving applicants who wish to raise capital through the popular VIE route, said Winston Ma, an associate professor at NYU Law School.
So-called Variable Interest Entity (VIE) structures are common among overseas-listed Chinese tech companies like Alibaba Group Holding Ltd and JD.com Inc, as they allow companies to circumvent Chinese restrictions on foreign investment in certain sectors.
Other agencies that may be involved in the VIE approval process include the National Development and Reform Commission, which oversees foreign ownership of Chinese companies, the Cyberspace Administration of China (CAC) and industry-specific regulators, Ma said.
The involvement of more regulators outside of the CSRC could also lead to more uncertainty around the approval, as some agencies could have different priorities, such as national security or privacy, bankers said.
The CSRC did not immediately respond to a Reuters request for comment.
NEW YORK OR CHINA?
For decades, New York was a lucrative stock exchange for Chinese companies, drawn by its high level of liquidity and the prestige of selling shares in the world’s largest economy.
That all but stopped after mid-2021, when ridesharing company Didi Global went ahead with an IPO despite being asked by Chinese authorities to shelve the deal, prompting a regulatory backlash and Didi being delisted from the US market .
Last year, US listings of Chinese companies were worth less than $230 million, a massive drop from $12.9 billion in 2021, according to Refinitiv data.
The current rules, enacted after the Didi debacle, also require companies with data on more than 1 million customers to undergo CAC screening before they can sell shares abroad.
Wilson Yu, a private equity investor in a start-up working on smart driving software, said the start-up is now seeking a domestic listing instead of the New York listing it previously considered.
“I don’t think a foreign listing for the start-up would get Chinese regulatory rights due to data security. China doesn’t want data-sensitive companies to be listed overseas,” he said.
Despite the prospect of more bureaucracy, however, some advisors are noting that the guidelines are clear and preferable to the regulatory uncertainty that has reigned since mid-2021.
“Requiring approvals from more regulators is an additional burden that companies have to meet, as there is relatively clear guidance from Chinese regulators on what qualifications to list,” said Frank Bi, partner at law firm Ashurst.
(Reporting by Scott Murdoch in Sydney, Samuel Shen in Shanghai and Selena Li in Hong Kong; Editing by Sumeet Chatterjee and Edwina Gibbs)
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