China will tighten regulations governing overseas initial public offerings, but will not completely prohibit them
China will tighten regulations governing overseas initial public offerings, but will not completely prohibit them
While the Chinese government intends to tighten restrictions on Chinese companies seeking to list on foreign stock exchanges, the government will not completely prohibit them from doing so.
After midnight on Friday, the Securities and Exchange Commission proposed that any company seeking to go public in another country must first register with the agency and then comply with a set of requirements set forth by government officials.
As stated in the proposal, "Domestic enterprises issuing and listing securities overseas must strictly adhere to applicable laws, regulations, and relevant provisions on national security, including but not limited to those governing foreign investment, cybersecurity, and data security, as well as diligently fulfill their national security protection obligations."
Specifically, it stated unequivocally that companies may be barred from conducting foreign initial public offerings if authorities determine that they pose a threat to national security. It also stated that companies may be required to divest certain assets "to eliminate or mitigate the impact of overseas issuance and listing on national security," as well as divest certain assets "to eliminate or mitigate the impact of overseas issuance and listing on national security."
Several weeks of speculation about when and how Beijing might tighten its oversight of initial public offerings culminated in the publication of the draft regulations, which will be open for public comment until late January. Washington has also passed auditing regulations that could have an impact on Chinese companies, indicating that the relationship between the United States and China remains tense.
It was reported earlier this month by the Financial Times that the country was expected to "strictly restrict" the ability of companies that use a structure known as a variable interest entity, or VIE, to raise foreign capital from the United Kingdom.
A VIE is the formation of an overseas holding company that allows investors to acquire a stake in a Chinese company that would otherwise be impossible to do so due to government restrictions on the Chinese mainland. Companies such as Didi, the Chinese ride-hailing behemoth, as well as e-commerce and technology companies such as Alibaba (BABA), Pinduoduo (PDD), and JD.com have benefited from the system (JD).
The Draft Rules
VIEs are not mentioned at all in the draft rules. In published remarks Friday, a spokesperson for the regulator stated that firms with this structure would be permitted to list on international stock exchanges so long as they adhered to government regulations and registered with the regulatory body.
Even if Beijing does not intend to outright ban foreign listings, the government has taken a number of steps this year that appear to be aimed at discouraging Chinese companies from trading in foreign markets, which the government believes could pose a threat to national security if the country were to allow such trading.
Beijing's anti-tech crackdown gained national attention earlier this year when the government banned Didi from app stores just days after the company's NASDAQ initial public offering (IPO).
When Didi was arrested, authorities accused her of violating privacy laws and posing a security risk to the public network. Their actions were also widely perceived as retaliation for the company's decision to list outside of China rather than in the country's capital market. In the weeks following the IPO, Beijing proposed that companies with more than 1 million users seek approval before going public on the international market.
Beijing is not the only source of international tension. Foreign companies that refuse to open their books to US regulators will be delisted from the stock market, according to rules finalized earlier this month by the Securities and Exchange Commission (SEC). For years, China has refused to allow US audits of its businesses, citing concerns about national security.
Some businesses appear to be suffering from a high level of uncertainty. Didi announced earlier this month that it would begin the process of delisting from the New York Stock Exchange and relocating to Hong Kong "immediately," a move that would take effect immediately.
In addition to Didi, several other US-listed companies, including Baidu (BIDU), NetEase (NTES), and JD.com, have begun trading in Hong Kong, but none of those household names has yet followed Didi's lead and completely withdrawn from the New York Stock Exchange.
