China’s offshore rules to reduce uncertainty

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Securities and Regulatory Commission publishes draft rules on deposits by companies seeking to be listed abroad

China’s plan to tighten controls on overseas sales of shares by mainland companies is expected to ease the regulatory uncertainty that has rocked financial markets this year and blocked overseas listings, bankers and investors said. analysts.

But the securities regulator’s new filing system, designed to curb once-free Chinese listings in the US market and elsewhere, leaves open questions about the application of the rules and the criteria for compliance, they added.

“The new rules represent a comprehensive, systemic and market-oriented regulatory upgrade,” investment bank China International Capital Corp said. (CICC) in a note, but added that they contain “certain elements which require further comment and clarification.”

The China Securities and Regulatory Commission on Friday evening released draft rules requiring deposits by companies seeking to be listed overseas as part of a framework to ensure they comply with Chinese laws and rules.

Firms using a so-called Variable Interest Entity (VIE) structure will still be allowed to seek offshore quotes as long as they comply, which will take the uncertainty out of investors who feared China would block those quotes.

This risk was significant after the listing of Didi Global Inc. in the United States in July sparked a backlash from Chinese officials concerned about national security.

The VIE structure has been used by most of China’s overseas-listed tech companies, such as Alibaba and JD.com, to bypass Chinese restrictions on foreign investment in certain industries.

Uncertainty over the future of VIE structures, coupled with Chinese regulatory crackdown on major sectors such as e-commerce and tutoring, has caused shares of Chinese companies listed overseas to fall this year.

And while Chinese companies have raised $ 12.8 billion in the United States this year, the value of deals has ground to a halt after Didi’s listing in July. In Hong Kong, the value of IPOs in 2021 fell to $ 26.7 billion from $ 32.1 billion in 2020, according to data from Refinitiv.

Regulatory coordination

The reaction to the new rules will be visible on Monday when the US stock market resumes operations after the Friday shutdown for the Christmas holidays. Hong Kong stocks will resume trading on Tuesday.

The deposit-based system should also alleviate uncertainty by calling for closer coordination between the securities regulator and industry regulators, such as the cyberspace watchdog.

“The publication of the draft rules shows that the main barriers to communication have been removed between the various regulatory bodies,” said Ming Jin, managing partner of Chinese investment bank Cygnus Equity.

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