China's Offshore Listing Rules Spur Fear on Approval Process

The response to news that China’s securities regulator will permit foreign initial public offerings (IPOs) in foreign markets has been mixed.

That’s because the path for Chinese companies that want to list offshore looks longer and more complicated, bankers say.

New rules laying out how firms can list outside mainland China will often mean getting a nod from several government agencies and that could make for a lengthy approval process, they said.

The rules provide clarity after a regulatory crackdown by Beijing since mid-2021 that has slowed US listings by Chinese firms to a trickle.

Before the crackdown there was very little in the way of regulatory requirements, but now there are more hoops for companies to jump through. Those hoops, combined with US-Sino tensions over a multitude of issues from suspected spy balloons to trade friction, means a rush of Chinese firms seeking initial public offerings in New York is unlikely.

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Additional procedures

“It’s not exciting news because now you need 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 finalised rules, which come into effect from March 31, stipulate that firms wanting to list in markets like the United States or Hong Kong will need to make a filing with the China Securities Regulatory Commission (CSRC) as well as gain approval from other relevant regulators.

“Previously, you only needed to worry about setting up an offshore structure for listing. Now, you need to report everything,” said Guo.

Under the new rules, a host of government authorities would become involved in approving applicants looking to raise capital via the popular VIE route, said Winston Ma, an adjunct professor at NYU Law School.

So-called variable interest entity (VIE) structures are common among overseas-listed Chinese technology companies such as Alibaba Group Holding and JD.com as they enable companies to skirt Chinese restrictions on foreign investment in certain sectors.

Other agencies that could get involved in the VIE approval process include the National Development and Reform Commission, which supervises foreign ownership in Chinese companies, the Cyberspace Administration of China (CAC) and industry-specific regulators, said Ma.

The involvement of more regulators beyond the CSRC could also lead to more uncertainty around approval as some agencies could have different priorities such as national security or data protection, bankers said.

The CSRC did not immediately respond to a request for comment.

US listings crashed in mid-2021

New York for decades had been a lucrative listing venue for Chinese companies attracted to its deep liquidity and the prestige of a share sale in the world’s largest economy.

That all but ground to a standstill after mid-2021 when ride-hailing company Didi Global pressed on with an IPO despite being urged by Chinese authorities to put the deal on hold, prompting a regulatory backlash and Didi to delist from the US market.

Last year, US listings of Chinese firms were worth less than $230 million, according to Refinitiv data, a massive drop from $12.9 billion in 2021.

Enacted in the wake of the Didi debacle, current rules also require companies with data of more than 1 million customers to undergo a review by the CAC before they can sell shares overseas.

Wilson Yu, a private equity investor in a startup working on software for intelligent driving, said the startup is now seeking a domestic listing instead of New York, which had been under consideration earlier.

“I don’t think an overseas listing for the start-up would get the Chinese regulatory nod due to data security. China doesn’t want data-sensitive companies to list overseas,” he said.

Despite the prospect of more red tape, however, some advisers note that the guidelines are clear and are preferable to the regulatory uncertainty that has prevailed since mid-2021.

“Requiring approvals from more regulators is an extra burden companies will comply with as there is relatively clear guidance from the Chinese regulators in terms of the qualifications to be listed,” Frank Bi, a partner at law firm Ashurst, said.