China offshore listing: China’s offshore listing rules should reduce market uncertainty

HONG KONG: China’s plan to tighten scrutiny over mainland companies’ offshore share sales should help reduce the regulatory uncertainty that roiled financial markets this year and stalled offshore listings, according to bankers and analysts.

The China Securities and Regulatory Commission (CSRC) published draft rules late on Friday requiring filings by companies seeking offshore listings under a framework to ensure they comply with Chinese laws and regulations.

Companies using a so-called variable interest entity (VIE) structure will still be allowed to seek offshore listings as long as they are compliant.

The rules remove uncertainty for investors who had feared that authorities would block offshore listings of VIE-structured companies to plug a regulatory loophole.

VIE is a structure adopted by most overseas-listed Chinese tech companies, such as Alibaba and, to skirt Chinese restrictions on foreign investment in certain sectors.

Companies and investors should feel reassured that the filing-based system will also involve close coordination between CSRC and various industry regulators, such as the cyberspace watchdog.

“The issuance of the draft rules shows that major communication obstacles have been removed between different regulatory bodies,” said Ming Jin, managing partner at Chinese boutique investment bank Cygnus Equity.

“Now we will see how regulators are going to execute it and how U.S. regulators will react.”

Reaction to the new rules will be seen Monday when the U.S stock market resumes trading after the Christmas holiday, which included Friday. Hong Kong stocks will resume trading on Tuesday.

“Overall, it is a good sign that more clarity has been given,” said a banker at a Wall Street firm in Hong Kong who declined to be identified as he is not authorised to speak to media.

The success of the rules would depend on their implementation, he said.

Winston Ma, adjunct professor at NYU Law School, said that the issue of cross-border data security had become critical in the global digital economy and was a main driver for the new rules.

“As such, under the proposed new rule, cybersecurity review must be completed before the CSRC clearance process,” Ma said.

Uncertainty over the future of VIE structures coupled with regulatory crackdowns in a number of major sectors in China had dampened the value of listings of mainland firms in offshore markets.

Chinese firms raised $12.8 billion in the United States but the value of deals ground to a halt after Didi Global Inc‘s listing in July that prompted a major regulatory backlash from officials.

In Hong Kong, the value of IPOs in 2021 fell from $32.1 billion to $26.7 billion, according to Refinitiv data.

A public consultation on the draft rules will remain open until Jan. 23.

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