Venture capital investors in China are looking elsewhere as regulations for initial public offerings (IPOs) grow in the United States

[ad_1]

A Chinese day trader plays cards with others at a local brokerage house in Beijing on August 27, 2015, a summer that saw big sell-offs in Chinese stocks.

Getty Images

On Saturday, China’s cyberspace regulator suggested that any company with data on more than one million users should undergo a cybersecurity review before being listed overseas. The regulator, whose influence in China has grown rapidly, said public comment on the proposed rules would close on July 25.

This came after last Tuesday’s announcement by the top executive body and the Central Committee of the Communist Party of China to crack down on illegal securities activities, which included further scrutiny of private equity and venture capital funds, as well as overseas fundraising through shares.

“There is absolutely no impact on exit, investment direction and investment stage” for a company like ours, Michael Xu, managing partner at China-based CEC Asset Management, said Thursday, referring to increased securities regulation. This is according to CNBC’s translation of his Mandarin notes.

The only aspect the company will need to pay more attention to is whether investment projects have any shareholders without a clean track record with the securities regulator, Xu said.

Big tech giants such as Alibaba and Tencent, which have backed a large number of US-listed companies, have also come under heavy scrutiny in China’s crackdown on antitrust practices last year.

Looking to other IPO markets

Investors’ interest in China has risen. Deals from venture capital and private equity-backed acquisitions totaled $74.3 billion in the first quarter of this year, according to Preqin. This is the largest number in any six-month period since the first half of 2018.

Getting returns from these investments is the priority, said Jeff Wu, a China-focused partner at Silicon Valley-based Pegasus Tech Ventures. In light of recent developments in the market, he said he is looking to exit investments via listings in Hong Kong or special purpose acquisitions overseas.

However, mainland China has struggled with its own efforts to keep technical IPOs at home. Authorities launched the Star Board in Shanghai in July 2019, which features a registration system for public offerings, rather than regulatory approval.

The subscription process has been suspended on the basis of registration. As of June 20, EY said more than 500 companies were on the China Securities Commission’s waiting list for an IPO on the Star board and a Shenzhen-based technology-focused stock board called ChiNext.

“Chinese investors are not developed enough yet, and the legal environment is not mature enough to accommodate this registration process,” said Chu Ning, a professor of finance at Tsinghua University.

Read more about China from CNBC Pro

He noted that China’s securities law has so far been “much less punitive” than in the United States, and that recent securities regulation “is in line with the Chinese authorities’ ongoing efforts to improve listing requirements and standards.”

“It is important for investors to keep in mind that China is still an emerging economy. No matter how fast it grows, the institutional background is still different,” he said.

The increasing scrutiny by the Chinese government of domestic companies listed in the United States comes as tensions between the two countries erode into the economic and financial relations that have arisen between the past few decades.

Under the Trump administration, the White House has begun calling for less US investment in Chinese assets. Since President Joe Biden took office in January, his administration has maintained a tough stance on China.

Consulting firm Eurasia Group said in a note over the weekend that the fallout from Didi’s listing would intensify US political pressure to place limits on Chinese stock offerings. In short, the spigot for Chinese IPOs in the US is likely to be drained, the authors said, noting that many Chinese companies have already canceled plans for US IPOs.

Previously, Chinese companies were going public in the US at a record pace — accounting for 15% of the US IPO market in the first half of the year, according to Renaissance Capital.

One strategy that Chinese companies have pursued recently is listings in both the US and Hong Kong – to hedge against delisting risk while acquiring a large pool of institutional investors.

This trend is likely to continue, said Ming Liao, founder of Beijing-based Prospect Avenue Capital, which has plans to list its US-invested companies. He said the company was “happy” with the latest regulatory developments as it outlines oversight for different agencies.

Continuing regulatory uncertainty

As investment funds look for other ways to exit their holdings, the Chinese government’s scrutiny of stock offerings is not going away.

Beijing said in its five-year national development plan adopted in March that the authorities aim to “fully implement” share issuance registration and improve the “quality” of listed companies, while stepping up efforts to ensure national security and crack down on monopolistic behavior.

Ringo Choi, EY’s head of IPOs in the Asia Pacific region, said he expects public uncertainty around IPOs to continue in the short term, as clarification of some policies could lead to other regulations. He noted that in China, the actions of one regulator may force another administration to take similar steps.

.

[ad_2]