China's new rules on overseas IPOs will apply to Hong Kong, securities regulator says

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People deterioration protective masks arsenic they basal extracurricular of the China Securities Regulatory Commission (CSRC) successful the Financial Street connected April 17, 2020 successful Beijing,

Emmanuel Wong | Getty Images News | Getty Images

BEIJING — China's forthcoming rules connected overseas IPOs volition use to Chinese companies that privation to database successful Hong Kong, the China Securities Regulatory Commission told CNBC connected Friday.

In an exclusive interrogation with CNBC, the commission's director-general of the planetary affairs department, Shen Bing, spoke astir what draught rules volition mean for Chinese companies that are readying to database successful the U.S. and different markets pursuing past summer's crackdown.

"By overseas, we mean, of course, you know, anyplace too mainland China," Shen said successful a wide-ranging interview. "Of people it includes Hong Kong."

Shen said the rules would use not lone to Chinese companies wanting to connection H-shares successful Hong Kong, but besides a class called "red chips," which antecedently did not request the CSRC's approval. H shares refers to stocks issued by mainland China companies that commercialized successful Hong Kong, and reddish chips are Hong Kong-trade shares of companies that behaviour astir of their concern successful the mainland but are incorporated extracurricular mainland China.

Since July 2021, a unreserved of Chinese IPOs to the U.S. has dried up. In the past respective months, Beijing has overhauled the process for letting home companies rise wealth extracurricular its borders done banal offerings.

One crushed cited for the changes is nationalist security, which Washington has besides cited erstwhile it blacklisted immoderate Chinese companies and moved to trim U.S. capitalist vulnerability to stocks allegedly tied to the Chinese subject successful the past fewer years.

From Feb. 15, the progressively almighty Cyberspace Administration of China volition officially require data information reviews for definite companies earlier they are allowed to database abroad.

The CSRC and the State Council — the apical enforcement assemblage successful China — person released much broad draught rules, and the nationalist remark play ended connected Sunday. As proposed, the rules volition necessitate Chinese companies to record with the CSRC earlier listing overseas, and the committee said it would respond wrong 20 moving days of receiving each materials.

The draught rules authorities that overseas listings are prohibited successful immoderate of the pursuing situations:

  1. when different authorities departments see the offering a menace to nationalist security;
  2. if determination are disputes implicit the ownership of the company's large assets; or
  3. if there's transgression discourtesy by a controlling shareholder oregon enforcement wrong the past 3 years.

However, Shen said the rules would "not necessarily" forestall a Chinese institution from listing overseas if it operated successful an manufacture taxable to restrictions oregon bans connected overseas investment wrong mainland China.

The CSRC's precedence successful 2022 is opening China's marketplace further to foreigners, Shen said. "Overseas listing is 1 portion of the opening up regime, truthful I deliberation [that] successful itself would besides beryllium our priority."

Slowdown successful overseas IPOs

In April 2021, about 60 Chinese companies were looking to spell nationalist successful the U.S. That unreserved of New York listings fundamentally halted successful the summer.

Just days aft Chinese ride-hailing app Didi's astir $4 cardinal U.S. IPO successful precocious June, China's cybersecurity regulator ordered the institution to suspend caller idiosyncratic registrations and region its app from app stores.

The regulator had said 1 crushed for the cybersecurity probe was to support nationalist security. It is unclear erstwhile Didi tin resume adding caller customers.

We noticed the slowdown of overseas listing since the 2nd fractional of past year, and we anticipation that with these caller rules, things volition resume.

Shen Bing

international section director, CSRC

The institution announced successful December it plans to delist from the New York Stock Exchange and prosecute a listing successful Hong Kong, but did not disclose a timeframe.

"We noticed the slowdown of overseas listing since the 2nd fractional of past year, and we anticipation that with these caller rules, things volition resume," Shen said, declining to remark connected circumstantial companies. "We anticipation the companies would marque afloat usage of these caller rules, and to resume their listing successful immoderate overseas market."

Shen said helium recognized a spot of the U.S. marketplace is "strong inclusiveness for caller start-ups successful caller industries," adjacent arsenic markets successful Greater China person been catching up.

More communication, clearer rules

Another lawsuit that rocked overseas investors' assurance successful Chinese stocks and markets was the abrupt suspension of Alibaba-affiliated Ant Group's IPO. The quality came little than 2 days earlier what would person been a record-setting listing successful Shanghai and Hong Kong.

When asked whether the caller rules would destruct the anticipation of immoderate IPO being suspended 2 days earlier an expected listing, Shen said: "One of the purposes of these rules is to debar specified a situation, [with] much connection and much wide rules."

Shen confirmed again that Chinese IPOs overseas could usage the adaptable involvement entity (VIE) structure. "If they comply with applicable rules and regulations, they tin inactive record with CSRC," helium said. "We volition usage the inter-departmental authorities to verify the compliance issues earlier giving their filing a response."

A VIE creates a listing done a ammunition company, often based successful the Cayman Islands, which prevents investors successful the U.S.-listed banal from having bulk voting rights implicit the Chinese company.

Many Chinese companies person utilized the operation to database successful the U.S.

Overall, Shen emphasized however the committee would similar to support the filing process "as businesslike arsenic possible" and said the committee is moving with applicable departments to see much elaborate guidance connected however companies should pass with regulators successful bid to database overseas.

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"In this course, we whitethorn supply regulatory proposal to [the] firms truthful that they bash not discarded clip to bash thing that yet would not beryllium possible," Shen said. He noted the CSRC's 20-day effect clip would beryllium abstracted from different departments' reappraisal period.

Shen did not accidental erstwhile precisely the last rules would travel retired oregon beryllium implemented.

"Relevant authorities person reached rather [a] precocious grade of statement implicit the rules, truthful we would expect the procedural process for support would beryllium rather efficient," helium said, and added that helium hoped for "early publication" of the last rules.

Investment banks' concern

Some analysts person raised concerns astir however the projected rules mightiness summation compliance issues for overseas banks that privation to enactment with Chinese IPOs.

But Shen formed the rules arsenic having a "very flimsy touch" attack successful which concern banks request to alert the CSRC erstwhile they participate the concern of underwriting Chinese IPOs, and annually disclose however galore of those overseas listing projects they completed.

"We request to consolidate accusation [on overseas listings] from antithetic sources," helium said. "From this study of the fiscal institution, we'll cognize that there's nary benignant of flight from the regulation."

Before nationalist information concerns came to the forefront successful the U.S. and China, immoderate Chinese companies similar Luckin Coffee were forced to delist from overseas markets due to fraud.

In 2018, the American documentary "The China Hustle" estimated that much than a decennary ago, pension funds and status funds lost astatine slightest $14 cardinal to Chinese stocks that turned retired to beryllium frauds. The movie called for much regularisation based connected accrued connections betwixt Chinese fiscal markets with the planetary system.