U.S.-listed Chinese companies need Beijing’s approval for secondary listings

U.S.-listed Chinese companies need Beijing's approval for secondary listings

An investor sits in front of a stock information board at a brokerage office in Beijing, China.

Thomas Peter | Reuters

BEIJING — As US regulation forces Chinese companies to pull out of New York, new rules from Beijing make their way to raise money in public markets abroad even more difficult.

As of Tuesday, new rules from the Cyberspace Administration of China require Chinese internet platform companies with personal data of more than 1 million users to obtain approval before listing overseas.

While the rules don’t apply to companies that have already gone public, those seeking dual or secondary listings abroad must follow the CAC’s new approval process, according to a CNBC translation of a Chinese article published on the website on Thursday published by the regulator.

This is another consideration for international investors looking at Chinese companies.

“The timeline for listing companies overseas has lengthened and uncertainty surrounding listing has increased,” said Ming Liao, founding partner of Beijing-based Prospect Avenue Capital, according to a CNBC translation of the Chinese remarks.

As regulators and companies figure out how the new measures will be implemented, institutional investors are hoping to better understand the government’s mindset by seeing some overseas listing approvals, he said.

The fallout from the US IPO of Chinese ride-sharing app Didi in late June prompted Beijing to tighten regulatory scrutiny over a rush by Chinese companies to New York to raise funds.

Chinese IPOs in the US have essentially dried up in the months since, while existing US-listed Chinese stocks could be dropped from Washington’s tighter screening requirements in the coming years.

Several of these Chinese companies, including Alibaba, have approached Hong Kong for dual or secondary listings in recent years. In the event of a delisting, investors could exchange their US shares for those in Hong Kong.

The Hong Kong option

According to a January China Renaissance analysis by Bruce Pang and his team, only about 80 out of 250 Chinese companies listed in the US would have been eligible for a secondary or secondary listing in Hong Kong. This is due to Hong Kong’s strict minimum market capitalization requirements and other factors.

The remaining US-listed Chinese companies would likely have only one choice: to privatize and then attempt a listing on the mainland’s A-share market, the report said. “In practice,” the analysts said, “we believe Hong Kong will not be exempted from the cybersecurity process — in our view, the door is still open for Beijing to order a cybersecurity review of proposed Hong Kong listings.”

The mainland market is less accessible to foreign investors and dominated by more mood-driven retail investors.

Analysts also point out that Hong Kong’s stock market doesn’t compare to New York in terms of trading volume and the price technology companies can fetch for their shares.

It remains to be seen to what extent the cybersecurity check will apply to future Chinese stock offerings in Hong Kong.

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U.S.-listed, China-based companies seeking secondary or dual listings in Hong Kong only require a CAC review if the regulator finds a national security risk related to the companies’ products or data processing, said Marcia Ellis, Global Chair of Private Equity Group at Morrison & Forrester, Hong Kong.

That’s “a different threshold” than the CAC verification required for listings outside of China in markets like London or Singapore, Ellis said. In these cases, companies can process personal data more than 1

Millions of users would require CAC approval before going public.

“Actually, CAC’s recent statements have only clarified a few things and closed some potential loopholes,” she said.

The latest CAC regulation makes no mention of Hong Kong.

In Thursday’s article, however, the regulator said its new overseas listing regulation “does not mean operators can ignore relevant network security, data security and national security risks in the Hong Kong listing process.”

Days after Didi’s listing, the CAC ordered the company to suspend new user registrations and remove its app from app stores while the regulator launched a cybersecurity review over privacy concerns.

In December, Didi announced that it plans to delist from New York and relist in Hong Kong. The company has yet to confirm when this transition will take place, and it’s unclear if the cybersecurity review is complete.

Shares are down more than 14% so far this year after falling 64% in the roughly six months of trading in 2021.