After nearly a year of negligible deal activity, the prospects for Chinese companies in the US are finally looking up for issuers, bankers and investors say.
In a concession to a threat by the US Securities and Exchange Commission to delist Chinese companies traded in New York for not meeting the auditing requirements, the China Securities Regulatory Commission (CSRC) said on 2 April it has proposed to let overseas regulators look into the audits of companies listed abroad.
A cheer went up across the street. The Hang Seng Index shot 2.1% higher the following session on 4 April to close at the best level in a month. China’s e-commerce behemoth Alibaba [NYSE:BABA] surged 6.6%, while peer Baidu [NASDAQ:BIDU] was up 9.1%.
Proposed revisions made to the working document, named Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing, specify “that requests made by overseas regulators to conduct investigations, including collecting evidence for investigation purpose, and inspections in the Chinese mainland shall be carried out through cross-border regulatory cooperation mechanisms,” the CSRC said.
The existing rules have “played a positive role in promoting confidentiality...related to overseas securities offering and listing since they were first released in 2009,” the CSRC said. “After more than a decade, however, the document has not kept up with the changing legal and institutional landscape, and the evolving market and regulatory practices.”
But the party didn’t last long, though that also had Russia’s war in Ukraine to blame. China’s ADR Index, which gained 8.3% in the first two trading sessions of April (1 April and 4 April), gave up 3% the following session (5 April).
“Ultimately, it boils down to whether the US SEC considers the concession as sufficient,” a Hong Kong-based investment banker said. Until the dust settles on the matter in both China and the US, participants will remain cautious and this will continue to haunt IPOs of Chinese companies, China-sponsored special purpose acquisition companies (SPACs), and any de-SPACs involving Chinese targets, he said.
An investor was rather skeptical. “Tell me, which of the US-listed tech companies are not data-sensitive?” he said. “None.”
The US wants 100% access to the audits of all the companies, without exceptions, he went on. Until that happens, he said he would give any statement from China a pinch of salt.
The window for ADR listings of Chinese companies has been largely shut down since Didi Global’s [NYSE:DIDI] USD 4bn IPO priced in late June 2021. China’s authorities launched a cybersecurity review on Didi’s business within days after Didi’s IPO pricing, taking its app from all phone-app stores, citing violations on the collection and use of personal information.
Meanwhile, amid all the cross-border regulatory uncertainties, investors and dealmakers continue to find China’s domestic markets a viable hunting ground.
China’s implemented stock exchange reforms that allow IPO candidates to take a fast-track via a registration-based system for STAR Market and ChiNext listings helped make it the largest IPO market in Asia last year. China also launched the Beijing Stock Exchange in November 2021 in a bid to attract listings of small and medium-sized enterprises.
China’s domestic listings, nonetheless, have been rather fragmented in terms of sector activity, with computer electronics and semiconductors making up around 11.5% of the share over the past two years.
Recent commentary from long-only investors such as Baillie Gifford have warned against “the more melodramatic reactions to Chinese regulations”. Others, such as T Rowe Price have suggested in recent months that we are nearing the end of the “current regulatory cycle” in China.
