China has secured its hold on proposed offshore listings with new rules that bankers and lawyers say will favor Hong Kong and China’s domestic markets over Wall Street.
The rules, which take effect in late March, come nearly two years after Beijing pulled the brakes on lucrative IPOs in Hong Kong, New York and other offshore jurisdictions as part of a sweeping regulatory crackdown.
“We may be seeing some rebound in U.S. IPOs by Chinese companies, but it’s hard to imagine flows returning to their prime,” said Zhan Kai, a Shanghai-based senior counsel at Chinese law firm Yuanda. “The US capital market is in some ways irreplaceable, but many Chinese companies have not fully healed the trauma of the Sino-US geopolitical conflicts.”
The cost of this lost business is likely in the billions of dollars. In the two years before the crackdown, overseas listings of fast-growing Chinese tech companies raised more than $40 billion each year and netted investment banks, including Goldman Sachs and Morgan Stanley, more than $1 billion in annual fees.
That all changed when ride-hailing company Didi Chuxing pushed ahead with a stock sale in New York in June 2021, despite national security concerns from Chinese regulators. Days later, Beijing launched a crackdown on the tech sector, effectively halting all but a handful of offshore listings pending the release of revised regulations.
Nearly 90 percent of the $76 billion raised by Chinese IPOs last year was raised in Shanghai and Shenzhen, with almost all the rest in Hong Kong.
The new rules, released by China’s securities regulator on Friday, provide the first unified regime for screening and oversight of overseas-traded companies.
Before the crackdown, Chinese issuers could simply set up an offshore structure known as a variable interest entity to sell shares offshore. This allowed them to avoid the lengthy vetting process for onshore IPOs and circumvent restrictions on foreign investment in certain sectors.
The new regime codifies the VIE structure, which now requires approval from the Commission and other relevant regulators before the IPO process can begin.
Jason Elder, a partner at Hong Kong law firm Mayer Brown, said the new rules should have a “positive impact” on the pace of offshore IPOs and “streamline the route to listing for PRC-based companies and provide greater security for companies considering an offshore listing”.
But bankers said companies are still wary of testing how safe it is to sell stocks abroad, particularly in New York.
“Everyone is still waiting when applying for a US listing,” said an IPO banker at a state-owned brokerage firm in Beijing. “These are new rules and people have yet to wait for the staff reshuffle at the financial regulators.”
This will likely happen after the annual meeting of China’s stamp legislation, which is due to start next month, he added.
The shadow cast by US-China tensions – most recently compounded by China’s ties to Moscow and Washington, where Beijing has been accused of flying a spy balloon over the US – also remains a concern for issuers. This comes despite Beijing and Washington taking a big step last year to resolve a standoff over access to audit records for Wall Street-listed Chinese companies.
An executive at a freight logistics service provider in China that plans to go public this year told the Financial Times that even with the new offshore listing regime, the group will “only consider Hong Kong and mainland listings” to avoid geopolitical risks to avoid .
It could also be difficult to get large and more lucrative listings across the finish line, international wealth managers said, as investor demand for Chinese stocks has yet to fully recover.
“We have yet to see major global institutional funds rekindle their appetite for China investing, and this is exactly the type of investor you need for a large-scale offshore IPO,” said the head of institutional sales in Asia for a western wealth manager. “Certainly the appetite is recovering a bit, but people are still very cautious.”
Chinese authorities have taken pains to indicate that the long crackdown on tech giants has ended, and in its announcement on Friday the commission said it would “support companies that use both.” [onshore and offshore] markets . . . and undeterred in sharing the benefits of China’s economic growth with global investors.”
However, investors and analysts have been alarmed by the recent disappearance of Bao Fan, head of investment bank China Renaissance, which acted as bookrunner on many offshore listings – including ill-fated float Didi Chuxing.
Andrew Collier, China country analyst at GlobalSource Partners, a consulting firm, said: “Bao Fan [disappearance] shows that this crackdown is not over.”
Recommended
Bankers believe foreign listings are likely to be concentrated in Hong Kong, where perceived risk from regulators in both the US and China is lower.
“Hong Kong desperately wants this business to come back,” said Fraser Howie, an independent expert on Chinese finance. “The fact that it’s outside of the [capital controls] there is a huge advantage that no other city in China has. . . Hong Kong is a natural favorite in that sense, although I don’t see it going back to the golden days.”
“The US is definitely a no-go now, and that will certainly favor Hong Kong,” said Federico Bazzoni, chief executive of investment banking at Vantage Capital Markets. However, he added that reforms to streamline China’s onshore listing architecture, announced alongside the new offshore listing regime, could encourage more issuers to choose a mainland listing over Hong Kong.
“The real winner in all of this could be the A-share market in China,” Bazzoni said, referring to stocks traded domestically in Shanghai and Shenzhen.
Comments are closed.