china announces new ipo rules

China has announced new rules for domestic companies looking to list overseas. The rules come two years after Didi’s ill-fated US IPO where the company was forced to delist within months of its listing.

The rules are quite similar to the draft that China’s securities regulator issued towards the end of 2021. While that draft did not mention any timeline, the current set of rules is set to go into effect from March 31.

The China Securities Regulatory Commission (CSRC) would have the power to scrutinize any overseas IPO of Chinese companies. The rules mandate that overseas listing of Chinese companies should not be a threat to the country’s national security.

Incidentally, China forced Didi to delist over national security concerns. One of the reasons China forced Didi to delist from the US was because the country feared that the data of Chinese citizens might be compromised. Commentators in China also pointed to the foreign ownership of Didi as SoftBank and Uber own the majority of the shares.

The country also banned the downloads of Didi apps in the country. Last year, Didi paid a massive fine to China and the country eventually allowed app downloads.

Meanwhile, the new IPO listing rule mandate that underwriters should annually report to the CSRC their association with Chinese companies listing overseas. Companies violating the rules would be liable to pay a fine of upto $1.5 million.

China Announced New Overseas IPO Rules

Under the new rules, all the Chinese companies listed overseas should register with the CSRC. Also, the regulator would also look after companies that are listed overseas as variable interest entities (VIEs).

Many Chinese companies including NIO and Alibaba trade on the US markets as VIEs Both Chinese regulators and the US SEC have been looking to clamp down on the practice.

US-listed Chinese stocks slumped last year amid fears of delisting. However, China struck a deal with US regulators that would help prevent the forced delisting of Chinese companies from the US markets.

China has allowed US regulators to audit the books of US-listed Chinese companies failing which they would have been delisted. Alibaba was among the Chinese stocks that faced a possible delisting in the US.

Last year, Alibaba stock fell below the IPO price. It has since rebounded sharply. There is a guide on how beginners can buy Alibaba stock.

What do the New IPO Rules mean for Chinese Companies?

It was mostly business as usual for US-listed Chinese companies. Notably, despite the ongoing tussle between the US and China, several companies like Xpeng Motors and Li Auto raised funds by selling additional shares to US investors. Both these company did their US IPO in 2020

At the same time, they hedged themselves in case of a delisting. Alibaba went for a dual primary listing in Hong Kong. Also, companies like Xpeng Motors and NIO opted for a listing in Hong Kong.

NIO went a step further and also listed in Singapore. Last year, Baillie Gifford also increased his stake in NIO. Many analysts see NIO as a worthy competitor to Tesla. There is a guide on how to buy NIO stock.

All said, China announcing new IPO rules is a positive for the markets. After the Didi fiasco, the US market was practically closed for Chinese IPOs. The escalation in US-China tensions did not help matters either.

China Signals Support for Private Enterprises

Furthermore, the move reaffirms that China is now looking to support private enterprises. In its release, the CSRC said, “China stays committed to further opening up its capital markets.”

Amid a slowing economy, China has given multiple hints that it is now looking for rapprochement with foreign investors as well as the country’s tech sector.

Recently, the China Banking and Insurance Regulatory Commission approved Ant Financial’s request to more than double its registered capital for the consumer unit.

Guo Shuqing, Communist party chief of the People’s Bank of China said that the institution would support private companies amid the turmoil. Notably, China cracked down against the private Big Tech companies as part of the crackdown as the leaders feared that they are getting too powerful.

Given the US-China tensions and the still frozen US IPO market, it would be futile to expect a flurry of new Chinese listings in the country. However, it is nonetheless a move in the right direction as it removes uncertainty.

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