Western banks brace for extra scrutiny for Chinese offshore listings

Global investment banks will not reduce their appetite for lucrative work on Chinese companies’ overseas listings despite the extra scrutiny and increased paperwork proposed under new regulatory changes, multiple sources said this week.

The China Securities Regulatory Commission (CSRC) last week proposed rules on overseas listings that include a requirement that banks that manage a Chinese firm’s offshore listing register with the regulator.

Foreign banks will also have to file annual reports by Jan. 31 that detail the offshore listings of Chinese companies that they worked on during the year.

It is not clear how onerous the registration process will be or what will have to be included in the reports, but the requirement is unprecedented and unique, said the sources, which included several investment bankers and lawyers who work on overseas listings.

Going ahead, western banks will have to balance their desire for the millions of dollars in fees they earn by helping Chinese companies list on offshore bourses with the cost of tighter oversight.

“They want to hold the international banks as responsible as they do for any of the A-share listings,” said one of the sources, a capital markets banker with an European investment bank in Hong Kong, referring to the initial public offerings (IPOs) on Chinese exchanges.

“I don’t think its great but also its not surprising. It’s a move to increase their transparency and give themselves a much better view of what is going on in overseas deals that they did not have previously.”

The banker declined to be named due to sensitivity of the matter.

Chinese firms’ public offerings in the United States generated $1.6 billion in fee income for their underwriters from 2016 to 2020, according to Refinitiv data. This year, the listings generated $486 million in fees.

However, that was all earned in the first half of 2021 and since June there have been no new offshore listings as regulators announced plans to frame new rules to crack down violations such as anti-competitive behaviour and data privacy infractions.

Plans to tighten scrutiny over mainland companies’ overseas share sales may ease the regulatory uncertainty that roiled financial markets this year and stalled listings, bankers and analysts have said.

Tighter control

Hong Kong and New York bankers do the bulk of the work related to offshore listings by Chinese companies and they are not required to register with regulators in those jurisdictions or submit annual reports to them.

Also, capital market underwriters are typically supervised by the securities regulator in the markets where they operate.

Requiring offshore underwriters to register with the CSRC was an “unprecedented” move as Chinese authorities have not exercised “extra territorial jurisdiction” previously, said a Shanghai-based partner of a Chinese law firm.

The tighter regulatory control is aimed at fixing accountability in case of any wrongdoing or violation of rules by a company detected after the listing process, according to the banking and legal sources.

“This effectively means the Chinese regulators are further scrutinising the coverage and business of international underwriters,” said Frank Bi, a Hong Kong-based partner at Ashurst LLP who focuses on international capital markets.

“It is likely to raise concerns from various international banks for mandate approval due to this unprecedented request.”

Under the proposed rules, the CSRC will report any malpractice to the offshore regulatory authority of the offending bank and the underwriter may be banned for three months or up to one year from filing new listings.

However, some bankers seem unfazed by the proposed changes.

“If we are required to file, we will file. It’s not a big deal for us,” said a Hong Kong-based senior investment banker with a Wall Street bank, who declined to be identified as he was not authorised to speak to the media.

Authors: Scott Murdoch, Kane Wu, Selena Li, Reuters

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