Beijing Moves To Halt Foreign IPOs For Chinese Tech Firms As SEC Demands More Transparency

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by Tyler Durden
Friday, Aug 27, 2021 - 09:07 AM

The SEC is already advising American investors against buying shares of Chinese companies, while working behind the scenes to freeze any future IPOs as American regulators try to strong-arm Chinese firms into accepting and abiding by American auditing standards. But Beijing, unwilling to be seen caving to the US, is doubling down on its limitations to foreign capital markets and this morning the WSJ reports that China is moving ahead with new rules that would ban most tech companies from listing in the US, or in other foreign markets.

Since the implosion of the Didi IPO, safeguarding sensitive consumer data has been at the center of Beijing's crackdown on Big Tech. Now, China's Securities Regulatory Commission officials are telling WSJ that they're going to develop a new framework to vet IPOs, although companies with less sensitive data, such as those in the pharmaceutical industry, are still likely to receive Chinese regulatory approval for foreign listings.

The new rules have yet to be finalized, but the CSRC reportedly plans to implement them around Q4, and have asked some companies to hold off on overseas IPOs until then. But according to the draft seen by WSJ, China plans to establish a "mechanism" requiring companies to obtain formal approval for overseas IPOs from a cross-ministry committee that will be set up in the coming months.

Under the new rules, China would also establish criteria for approving, or denying, companies foreign IPO proposals. 

That China is working to limit foreign IPOs isn't exactly news. And while WSJ focused its story on China's data-security measures, some twitter users suggested that this new screening mechanism was a ruse, intended to stop Chinese firms from even considering new foreign offerings.

As for the controversy surrounding the Variable Interest Entity, the workaround used by Chinese firms to list in the US and Hong Kong (since Chinese law forbids foreign ownership of Chinese companies). The workaround has been more or less endorsed by the CCP. But now, officials are rethinking it given the demands from US regulators that Chinese firms accept more strict auditing standards.

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WSJ explains that the VIE structure has been vital for the past two decades for Chinese companies to have access to foreign capital, allowing them to register offshore and go public in the US or Hong Kong. Per WSJ, the new cross-ministry committee reviewing IPOs would include The new cross-ministry committee would include members from the CSRC, China’s internet watchdog and other ministries, they said. The Cyberspace Administration of China didn’t immediately respond to a request for comment.

Per WSJ, Chinese regulators have been complaining about the push for more restrictions.

In some of the recent meetings with companies and international investors, CSRC officials complained about the U.S. Securities and Exchange Commission’s plan to increase scrutiny of Chinese companies selling shares in the U.S., calling their approach heavy-handed, according to people familiar with the matter. The Chinese officials said some of the SEC actions have deepened the distrust between the two countries.

Chinese officials also complained in the meetings that the SEC didn’t reply to some of their proposals regarding the use of audit documents, the people said. The audit documents have been a centerpiece of the discussion between the two regulators and triggered Didi’s recent data security investigation.

China's crackdown on Big Tech firms and other businesses has hammered shares of Chinese firms listed of Hong Kong and the US.

But fundamentally, China's efforts to impose restrictions on IPOs are starting to take on a familiar dynamic: Beijing knows the SEC is trying to put an end to the use of VIEs, so the CCP is scrambling to stop Chinese firms from listing in the US - like telling one's boss "you can't fire me because I quit". 

Still, it's not clear how Beijing might react when US regulations actually force firms like Didi, Pinduoduo and others to delist.