China proposes tighter rules but no ban for offshore listings
China’s securities watchdog on Friday proposed tightening rules governing Chinese companies listing abroad, which it said would improve oversight while allowing them to continue to do so, the latest in a spate of regulatory moves by Beijing in 2021.
The draft rules, which had been keenly awaited by investors and were posted by the China Securities Regulatory Commission on its website, extend the CSRC’s oversight of offshore listings to Chinese firms with variable interest entity (VIE) structures.
There had been much uncertainty among investors and Chinese firms over how much tighter the new rules would be.
“China is tightening the screws on offshore listings but not turning the valves off completely,” Andrew Collier, managing director of Orient Capital Research, said of the plans.
The CSRC said that the existing rules regulating offshore listings were outdated and the proposed new ones reflect China’s desire to further open up and are “not about policy tightening”.
Previously, the regulator would only examine companies incorporated onshore in China that proposed an offshore listing, such as in Hong Kong.
Beijing has unleashed a flurry of regulatory tightening this year under President Xi Jinping, including clamping down on anti-competitive behavior, banning private tuition groups and reining in a debt binge by property developers in a wide-ranging campaign that has rattled domestic and global markets.
VIEs have mostly been used by companies that list on offshore stock markets, primarily the United States, to skirt Chinese rules restricting foreign investment in sensitive industries such as media and telecommunications.
Most offshore-listed Chinese tech firms, including Alibaba Group Holdings and JD.com Inc , use the structures, which give them more flexibility to raise capital, while also bypassing the scrutiny and lengthy IPO vetting process that locally-incorporated companies have to go through.
“The real key is how much data needs to be retained, location of servers, and whether the U.S. or China has responsibility for accounting,” Collier said.
CSRC said the proposed registration process should take up to 20 working days if adequate materials were submitted.
It will also require international banks that underwrite a Chinese firm’s offshore listing to register with the CSRC.
Offshore IPOs have provided an alternative source of capital for Chinese companies and a New York listing has been seen as a badge of honor for many.
But Beijing has been ramping up supervision of overseas listings since the $4.4 billion initial public offering (IPO) of ride-hailing giant Didi Global Inc and the proposals on Friday were not as stringent as some had expected.
Chinese firms have raised about $12.8 billion in U.S. listings in 2021, according to Refinitiv data, but the deals ground to a halt after Didi’s debut in New York in early July.
The CSRC said Chinese regulators respected the choices made by companies on listing locations and the rules would not be retroactively applied, adding that it would not consider whether firms met the requirements of overseas listing locations.
But the Chinese government can order a company to dispose of its assets or businesses if its offshore listing jeopardizes national security, according to the proposed new rules.
The announcement came as U.S. markets were closed on Friday for the Christmas holiday period.
In a VIE, a Chinese firm sets up an offshore company for an overseas listing that allows foreign investors to buy into it.
The offshore company enters into a series of contracts with the owner of the local Chinese company, which operates the business in China, to obtain 100% economic interest in that business, analysts have said previously.
Chinese IPOs on all world markets have reached a record $100 billion this year, Refinitiv data showed.
Authors: Kane Wu, Samuel Shen, Selena Li, Julie Zhu, Scott Murdoch, Tom Daly, Reuters