The number of venture capital-backed listings in China has declined in recent quarters, but recent reforms to the country’s IPO system could lead to more listings.
According to PitchBook data, 61 VC-backed Chinese companies have gone public so far this year, raising over $45 billion. About 39 were listed in the first quarter, down 22% sequentially.
As in most parts of the world, IPO activity in China has been negatively impacted by volatility in public markets. The country’s ongoing tensions with the US over national security and technology, as well as its recent “zero-COVID” policy, have also caused foreign investors to stay away from its stock exchanges.
Historically, many Chinese companies, including e-commerce giant Alibaba and “super app” provider Baidu, have preferred to list in other countries, most notably the US. But new IPO reforms could help lure tech companies back to Chinese stock exchanges.
Earlier this year, China’s Securities and Exchange Commission passed new policies and regulations for a registration-based IPO system that was rolled out at the country’s two largest stock exchanges: the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
Before the reform, these exchanges ran on a permission-based system, which meant that companies wishing to list had to obtain approval from the CSRC. The regulator would conduct a thorough review of IPO applications that would include financials, business plans, management and compliance to assess whether a company would be allowed to go public.
Under the new rules, introduced on the Shanghai STAR Market and the Beijing Stock Exchange in 2019 and 2021 respectively, approval will come from the exchanges themselves, not the regulator.
The CSRC instead focuses on a company’s compliance with national laws and regulations. It also no longer determines the price of the shares, which will be based on the market, and the cap on IPO prices, which is intended to limit fluctuations in the first trading days, has been removed.
With this new system, it is hoped that companies will be able to register in mainland China more easily. This could mean a significant increase in listings, however, it is important to note that the threshold for listing on the Shanghai and Shenzhen exchanges is higher than on smaller exchanges.
After the reforms were implemented, reports indicated that activity increased on both exchanges and that the first cohort to list in the new system saw significant gains in share prices.
Venture capitalist-backed companies have yet to follow, which makes sense given the current lack of investor interest in publicly traded tech companies. But as markets begin to recover, China could find more domestic tech companies on its stock exchanges than in previous years.
Featured image by Hugo Hu/Getty Images
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