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China proposes new approval framework for overseas listings

Randy Mancini 5 December 24, 2021
FILE PHOTO: People are seen on Wall Street outside the NYSE in New York
FILE PHOTO: People are seen on Wall Street outside the New York Stock Exchange (NYSE) in New York City, U.S., March 19, 2021. REUTERS/Brendan McDermid/File Photo

December 24, 2021

BEIJING (Reuters) -China’s securities regulator 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 China Securities Regulatory Commission (CSRC) said on its website that it had proposed establishing a new framework for the overseas listing of Chinese firms.

The draft rules extend CSRC’s oversight on offshore listings of Chinese companies to include those that have so-called variable interest entity (VIE) structures.

“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.

Previously, the regulator would only examine companies registered onshore in China that proposed an overseas listing, such as in Hong Kong.

VIEs have mostly been used by companies that list on overseas stock markets, primarily the United States, to skirt Chinese rules restricting overseas investment in sensitive industries such as media and telecommunications.

They give firms more flexibility to raise capital offshore, 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 registration process should take up to 20 working days if adequate materials were submitted.

DIDI IMPACT

Overseas IPOs have provided an alternative source of capital for Chinese companies in the past and a New York listing has been seen as a badge of honor for many.

Beijing has been examining 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 it was improving the regulatory system and was not tightening its policies, adding that the rules would not be retroactively applied and it would not consider whether firms met the requirements of overseas listing locations.

The news 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, Refinitiv data showed.

(Reporting by Kane Wu, Samuel Shen, Selena Li, Julie Zhu; Beijing Newsroom; Writing by Scott Murdoch and Tom Daly; Editing by Alexander Smith)