China proposes stricter rules but no ban on offshore listings

BEIJING, Dec.24 (Reuters) – The Chinese securities supervisory body on Friday proposed to tighten the rules governing the listing of Chinese companies abroad, which it said would improve supervision while allowing them to continue to do so, the latest in a series of regulatory measures taken by Beijing in 2021.

The draft rules, eagerly awaited by investors and published by the China Securities Regulatory Commission on its website, extend the CSRC’s oversight of offshore listings to Chinese companies with variable interest entity structures (VIE ).

There had been a lot of uncertainty among Chinese investors and companies about the tightening of the new rules.

“China is tightening the screws on offshore quotes but not completely closing the floodgates,” Andrew Collier, chief executive of Orient Capital Research, said of the plans.

The CSRC said existing rules governing offshore listings were outdated and the proposed news reflected China’s desire to open up more and was “not about policy tightening.”

Previously, the regulator only reviewed companies incorporated onshore in China that offered offshore listing, such as in Hong Kong.

Beijing unleashed a wave of regulatory tightening this year under President Xi Jinping, including cracking down on anti-competitive behavior, banning private lesson groups and curbing real estate developers’ debt spree in a sweeping campaign that rocked domestic markets and global.

VIEs have primarily been used by companies listed on offshore stock markets, primarily in the United States, to circumvent Chinese rules restricting foreign investment in sensitive industries such as media and telecommunications.

Most of the overseas listed Chinese tech companies, including Alibaba Group Holdings and JD.com Inc, use the structures, which give them more flexibility to raise capital, while bypassing the scrutiny process and the long IPO verification process that locally incorporated companies must follow. .

“The real key is how much data to keep, the location of the servers and whether the United States or China is responsible for the bookkeeping,” Collier said.

The CSRC said the proposed registration process is expected to take up to 20 business days if adequate documents are submitted.

It will also require international banks that subscribe to the offshore listing of a Chinese company to register with the CSRC.

DIDI IMPACT

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

But Beijing has stepped up oversight of overseas listings since the $ 4.4 billion initial public offering (IPO) from ridesharing giant Didi Global Inc (DIDI.N) and Friday’s proposals weren’t quite so. strict than some had expected.

Chinese companies raised about $ 12.8 billion in listings in the United States in 2021, according to data from Refinitiv, but the deals ended after Didi’s New York debut in early July.

The CSRC said Chinese regulators respect the choices companies make on listing locations and that the rules will not be applied retroactively, adding that it will not review whether companies meet the requirements for listing locations. ‘foreigner.

But the Chinese government can order a company to divest its assets or operations if its offshore listing endangers national security, under the proposed new rules.

The announcement came as US markets were closed for the Christmas holiday period on Friday.

In a VIE, a Chinese company creates an offshore company for an overseas listing that allows foreign investors to enter.

The offshore company is entering into a series of contracts with the owner of the local Chinese company, which operates the business in China, to secure a 100% economic interest in the company, analysts previously said.

Chinese IPOs in all global markets hit a record $ 100 billion this year, according to data from Refinitiv.

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

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