After a prolonged period of draconian anti-pandemic curbs and regulatory crackdowns whipsawed China’s capital markets, the world’s second-largest economy is pulling out all the stops to calm market jitters and restore investor confidence.
As part of this, the China Securities Regulatory Commission (CSRC) officially issued a set of regulations on offshore listings of Chinese enterprises, providing PRC companies aspiring to go public outside the mainland, especially Hong Kong and the United States, with some much-needed clarity.
Lawyers advising in this space applaud the new listing rules but admit now it’s perhaps too early to predict the impact of such move on IPO work in Hong Kong as the Chinese economy slowly claws back its strength. They are also keeping a close eye on China’s regulatory direction, on which the fortune of Hong Kong’s capital markets hugely hinges.
WHAT ARE THE NOTABLE PROVISIONS?
The Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, along with five supporting guidelines, have entered into effect on March 31.
The commission has under-scored offshore listing as a “key component” of China’s capital markets opening as the reshuffled central government put renewed emphasis on economic stability and foreign investment.
Notably, the new rules stipulated that PRC companies must file for registration with the CSRC within three months after submitting their IPO listing application in Hong Kong. But the commission can block listings that are prohibited by law or regulation or endanger national security, among other criteria.
In addition, the CSRC spelt out the guidelines regarding the listing of red-chip companies. Previously complicated waters, indirect listing of these firms incorporated outside the mainland but with most of their businesses in the PRC has fallen under the “substance over form” approach of the new rules, according to Denise Jong, a corporate partner at Reed Smith.
Some analysts hail the updated regulatory requirements as providing visibility into the historically challenging task of listing PRC businesses in Hong Kong. However, Jong believes the new rules will likely result in more costs and delays.
“This is not new. In the early 2000s, we also had such requirements for red chips to get a ‘no objection’ letter from CSRC, and it was only later that it was abolished and, instead, the (Hong Kong Exchanges and Clearings) requires a PRC legal opinion as to whether the IPO complies with Chinese legal requirements,” she says.
HOW WILL THE NEW RULES IMPACT HK IPO WORK?
Some observers believe that promulgating the offshore listing rules has created a sense of certainty that would prompt more mainland companies to float their shares in Hong Kong. In the meantime, easing tensions between China and the United States over audit-ing issues has boosted confidence in more listings of PRC companies on Wall Street.
Jong believes Hong Kong will likely prevail as a more ideal listing destination for Chinese enterprises.
“What makes Hong Kong more attractive than Wall Street (is) a diverse investor base which is international and Asian. The international financial institutions have been investing in Hong Kong-listed companies for a long time and therefore make for better than a bell-weather investor,” says Jong.
But she says it remains unclear whether the new rules will stimulate Hong Kong’s IPO landscape once subdued by strict pandemic restrictions and weak investment appetite. “(The new rules) will bring certainty to Chinese regulatory requirements for companies listing overseas (DiDi is an example of what happens when such regulatory requirements are not expressly enshrined in the IPO process),” says Jong, referring to the forced delisting of the mainland ride-hailing giant after it ramped through a New York listing against regulators’ flagging on data security.
“This added layer of requirements are likely, at least in the beginning, to increase costs and delays in the IPO process,” Jong adds. “But IPOs should increase over last year just because capital markets are expected to recover.”
HOW WILL IT UNFOLD IN THE LONG RUN?
Overall, Jong believes the benefits of issuing the new measures out-weighs some of the concerns for capital markets lawyers in Hong Kong. “It will bring more certainty to the process, and that is good for IPO applicants,” says Jong.
As for whether the development signals a deviation from China’s erratic regulatory decision-making in recent years, Jong believes this is the same story that has played out before.
“We have gone full circle to adopt what has been implemented before in similar fashion, and this is normal for every developing regulatory landscape,” she adds.
