China seeks to tighten electronic supervision of technology IPOs in Hong Kong

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China’s Internet regulator issued draft rules on Sunday requiring Hong Kong-listed companies to submit to a cybersecurity review if a share sale could affect national security, threatening a recent shift by technology groups to the region.

China’s Cyberspace Administration, the country’s powerful data watchdog, announced in July that it would tighten rules on companies seeking overseas listing, with companies holding data on more than 1 million users required to pass a security review. The guidelines at the time did not specify whether the ruling would apply to Hong Kong.

CAC launched an investigation into Didi Chuxing for suspected data breaches two days after its massive $4.4 billion initial public offering on the New York Stock Exchange in June. The passenger carrier was forced to stop registering new users during the investigation.

Global investment banks raced over the summer to redirect Chinese companies to a float in Hong Kong, which was seen as a more politically acceptable destination for tech groups to access global financial markets after cybersecurity reviews halted a pipeline of lucrative listings in the United States.

Ximalaya, a popular Chinese audio and podcast platform, filed for an IPO in Hong Kong in September after abandoning plans to list in New York. The Financial Times reported in August that ByteDance, the owner of the viral short video app TikTok, has revived plans to roll it out to the public in Hong Kong by early next year.

The draft rules published on Sunday are the first time Beijing has said some stock sales in Hong Kong will be subject to cybersecurity checks. This was also followed by the introduction of a comprehensive data protection regime that gave the CAC greater authority to survey how Chinese companies handle consumer data.

But the notice stopped specifying the prerequisites for this layer of scrutiny.

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The draft rules also require companies with large amounts of data related to China’s national security, economy or public interests to undergo a cybersecurity review when seeking merger or restructuring.

The CAC wrote that Internet companies seeking to set up headquarters, operational centers or research and development facilities overseas must also report to Chinese regulators in advance.

The draft rules were published a day before the opening of the Beijing Stock Exchange, a new market that will raise funds for small innovation-based start-ups as China tries to encourage companies to use local exchanges.

The Beijing Stock Exchange is part of the government’s broader push to create local technology leaders and reduce dependence on foreign operators.

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