China-US IPOs face disruption – but will emerge stronger
The US regulator’s demand for more disclosures from Chinese companies planning New York listings may be a death knell for the flow of IPOs between the two markets — but it could go a long way towards offering investors some much-needed transparency.
For all the tensions between the US and China, the regulators in the two countries appear to agree on one thing: that the past year’s frenzy of China-into-US IPOs needs to be brought in check.
Last Friday, the US Securities and Exchange Commission’s chair, Gary Gensler, laid out additional rules for Chinese IPO candidates, in response to China tightening the screws on its technology and education industries and causing a sell-off in major stocks.
Among the new SEC rules is a requirement that issuers disclose whether or not the Chinese regulator gave it permission to list in the US, risks around the approval being withdrawn and the potential risk of delisting.
In response, the China Securities Regulatory Commission said over the weekend that the two countries should work closely on screening IPO hopefuls, and find ways to supervise US-listed Chinese stocks.
The latest developments have naturally raised fresh concerns — that this is the beginning of the end for American depositary share (ADS) listings from Chinese companies in the US; that approvals will be hard to come by and the process will be incredibly long; and that investment banks are likely to lose what has, until recently, been a highly lucrative source of revenue.
But banks and investors shouldn’t call it a day just yet. The CSRC’s statement shows there is still hope for Chinese IPOs into the US — they will just take a slightly different shape.
A breather in deal flow is much needed, anyway. It will give technology and data-related companies some time to adjust to the tighter restrictions on accessing foreign capital, which the Chinese authorities have justified as an effort to ensure national cybersecurity.
The coinciding summer blackout period has made the slowdown of ADS deals seem more pronounced.
But once the CSRC begins approving overseas listings again — and it has indicated it will — issuers will start lining up.
A number of ECM bankers told GlobalCapital Asia this week that there is little doubt that companies, particularly new economy start-ups, will continue to tap the deep pool of investors in the US. Even when companies began facing the serious threat of delisting at the hands of former US president Donald Trump’s administration, they were undeterred — the rationale being that it was worth the risk of listing for even two or three years of fundraising in a sophisticated market.
And despite a severe bout of volatility in Chinese stocks late last month, investors are clearly still on board. The Nasdaq Golden Dragon China Index, which tracks US-listed Chinese stocks, fell 19.4% from July 22 to 27, but it has rebounded 3.23% over the past five days to 11,548.29 points.
In fact, the possible plans of co-operation between Beijing and New York bodes well for the future of the market, and for investors. They can expect more transparency and the chance to have a better grip of the investment risk — while safeguarding themselves from big losses that can be triggered by a sudden regulatory U-turn.
Gensler said the SEC will be carrying out additional reviews of filings for any companies with significant China-based operations, while the CSRC is keen on working with the US regulator to create a good policy and environment for the ADS listings market.
If both sides do co-operate, it can offer the market some stability and help it avoid Didi Global-like debacles.
Didi, China’s dominant ride-hailing company, floated on the New York Stock Exchange at the end of June. But while bookbuilding was a huge success, investors in its $4.4bn IPO were caught unawares when the Chinese cybersecurity authority swiftly turned on the company within days of its listing, ordering app stores to remove Didi for alleged illegal data collection.
Needless to say, its stock has slumped since, falling nearly 30% below its IPO price.
With the latest rules, China listings in the US will probably take a hit in the near term. But in the longer run, the SEC’s and CSRC’s collaboration may lead to a healthier ECM market.