Issue Background
New York – As of February, multiple Chinese companies filed for public listing on the New York Stock Exchange (NYSE) breaking a nearly a two month pause. On December 3, 2021 the China Securities Regulatory Commission set out new rules for Chinese companies wanting to list on foreign stock exchanges. Didi, the Chinese ride hailing giant, was forced to delist from the NYSE by Chinese regulators following an initial public offering (IPO) that ran counter to warnings by Beijing . On the heels of the scrapped ANT Financial IPO, Chinese regulators have scrutinized technology firms across multiple sectors.
This led to a dump of Chinese stocks by most major institutions and signaled the start of increasing crackdowns on tech companies listed on foreign stock exchanges. This forced promising startups in China to hold off on plans to IPO on foreign exchanges and even put the popular Variable Interest Entity (VIE), a common structure for Chinese firms to get to public listing, in the spotlight. This issue was also compounded by new rules from the US Security and Exchange Commission (SEC) which required Chinese firms listed in the US to disclose whether they are owned or controlled by a government entity and to allow the Public Company Accounting Oversight Board to inspect auditors. Allowing US auditors keys to Chinese accounting books is one of the many issues facing the future of IPOs. Often topics and technology are deemed a national security interest and even sharing basic personal data can run counter to Chinese cyber security laws. This further complicates investment considerations.
The current Chinese companies now filling for IPOs on are relatively small and none of them are in e-commerce or hold large amounts of data. This does not preclude issues of forced delisting in the future, nor signify a shift in US or Chinese policy. However, this could be seen as a positive development for both for Chinese companies looking to raise capital and US investors looking to gain exposure to the Chinese economy. There is still a lack of clarity on China’s financial or cyber security regulations towards Chinese IPOs and will likely approve IPOs on a case by case basis. Expect Chinese regulations to continue to evolve with the intent to protect Chinese proprietary IP and data considered national security relevant.
Key Points
- Key Point 1: These new fillings for NYSE listings all come from outside the contentious Tech sector. Indicating that Chinese tech-startups are still waiting for more regulatory clarity on their ability to raise capital overseas.
- Key Point 2: The Jiangsu Medical Manufacturer MeiHua made a successful IPO on Wednesday raising 36 million dollars. Indicating some confidence in Chinese IPO from US investors.
Recommendations
Investors should evaluate each opportunity on a case-by-case basis and consider the following factors: 1) Geopolitical landscape between the US-China-EU, 2) Local political & regulatory issues in China, 3) The stakeholders involved and their public personas, and 4) The US political system at the federal and state level, and general attitudes towards China at large. These critical factors combined with fundamental analysis of the company and Accessible Markets (TAM, SAM, SOM), should all be considered when investing into Chinese business opportunities.
FAO Global recommends bringing experts in the field to facilitate market & geopolitical understanding that supports extensive due diligence into investment opportunities.
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