For investors in Chinese equities, 2021 would ideally be a year to forget. But in reality, it will be remembered as a turning point for the market, when investors and issuers truly realized the risks associated with China ECM.
Mainland-based companies were able to list with lofty valuations on bourses in the US and Hong Kong early this year, with the IPO market remaining on a hot streak despite the pandemic continuing to take a toll on the global economy.
But the euphoria didn’t last long. The Chinese authorities trampled on the bull run in July when they hit the market with a broad crackdown on the technology and education sectors, and tightened guidelines on overseas listings. The move led to China-into-US IPOs all but drying up. While the Hong Kong bourse became the go-to listing avenue, the volatility from the regulatory environment still kept many issuers at bay.
As the year draws to a close, volatility is still reverberating across Chinese stocks — be it those listed in the US, onshore in Mainland China or in Hong Kong.
The Hang Seng Index, for instance, has fallen nearly 15% year to date. The Nasdaq Golden Dragon China Index, which tracks Chinese companies listed in the US, has slumped 41% year to date.
The latest shock? It came this week from SenseTime Group. The Chinese artificial intelligence company postponed its HK$6bn($767.8m) listing on Monday after it was blacklisted by the US Department of the Treasury. The firm put its deal on hold to update its prospectus and clarify risks associated with investing in the company.
SenseTime’s deal was likely to be the last hoorah for Hong Kong’s primary market this year. But the delay may very well be a blessing in disguise for the company — the IPO market is hostile for issuers, with investors wary about China risk and many closing up shop for the holiday period already.
There are two critical questions to now keep in mind. When will the dust settle and what will the ECM landscape look like when it does?
Bankers, investors and issuers should be finding answers to these as they position themselves for 2022, and a possible revival in confidence in Chinese stocks.
What is clear is that, as we head into 2022, Hong Kong will be the primary market of choice for Chinese companies seeking international capital. The once hot flow of China-to-US IPOs has frozen and is unlikely to reboot to levels anywhere near what it was.
Issuers that opt for a New York listing will be caught between the Chinese and US regulators, which have both become stricter. The US Securities and Exchange Commission requires open access to a listed company’s books, something that Beijing has long been stubbornly against, especially if it is for companies it says operate in sensitive industries.
That’s not to say the path to a Hong Kong listing will be smooth. Mainland-based companies won’t escape tight regulations there either. Hong Kong also falls under Beijing’s new regulatory regime for offshore IPOs, albeit a somewhat more forgiving set of rules compared to those governing Chinese firms eyeing US listings.
Technology companies, specifically those that rely on collecting personal data, should naturally prepare for a difficult period, given much of Beijing’s focus has been on these firms.
But other firms, including start-ups, should also keep their expectations in check, amid uncertainty around which industries could next fall victim to Beijing’s regulatory regime. What has become clear this year is that market participants should expect the unexpected — and know that the sky-high valuations once achievable on the HKEX are likely out of reach.