China Overhauls Overseas, Domestic IPO Rules

Companies based in China have been given more clarity around stock listings overseas, as the Chinese government has also introduced a major overhaul aimed at making the mainland’s own stock market more attractive to businesses such as tech giants and start-ups.

The China Securities Regulatory Commission on Friday outlined how domestic companies can file for public offerings overseas after complying with national security measures and personal data protection law.

The rules allow the variable interest entity structure used by many Chinese companies listing in markets such as the US, which involves listing through a shell company based in a location such as the Cayman Islands.

The rules, set to take effect on 31 March, follow a years-long crackdown aimed at reining in China’s massive tech firms.

Tech crackdown

Notably, Chinese regulators forced ride-hailing firm Didi Global to delist following its massive US IPO in June 2021, saying the company had broken data protection laws and was being investigated for “national security and the public interest”.

The new rules say internet platform operators with personal data on more than 1 million users must apply for a cybersecurity review before proceeding with an overseas listing.

Chinese companies are returning to the US IPO market this year following an 18-month lull, in part because US regulators said last year they were able to review the audit work papers of Chinese companies listed in the US, significantly reducing the risk of delisting.

Changes that came into effect on Friday for domestic mainland China IPOs are also aimed at making that option more attractive.

Flexibility

Companies listing on the Shanghai and Shenzhen stock exchanges are to be allowed for the first time to price their shares based on market demand, while requirements around areas such as revenue and profits have been loosened to attract start-ups.

China’s securities regulator has stepped back from reviewing IPO candidates, handing over this role to exchanges.

The regulator’s tight control over IPOs had been a disincentive for major tech firms such as Alibaba and Tencent, leading them to choose overseas listings instead.

“The all-out implementation of the registration system will widen and enrich the array of industries of listed companies and boost market liquidity,” said strategist Shen Chao of HSBC Jintrust Fund Management in Shanghai, in a research note.