China Promotes HK-Based IPOs While US SEC Dithers

Chinese regulators plan to keep foreign capital flowing despite escalating US tensions
By Fan Yu
Fan Yu
Fan Yu
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.
July 17, 2021 Updated: July 19, 2021

News Analysis

A plan seems to be emerging in China to allow foreign capital to keep flowing into the country while granting Beijing increased control over its companies’ stock issuances.

Earlier this month, Chinese regulators, including the Cyberspace Administration of China (CAC), the State Council, China’s cabinet, and the Chinese Communist Party’s (CCP) Central Committee, announced that a new regulatory framework is necessary to oversee foreign stock listings of Chinese companies. The decision comes weeks after ride-hailing app Didi Chuxing’s New York initial public offering, and it could slow the parade of Chinese tech IPOs into the United States.

But it might not slow the flow of foreign capital into China.

The CCP is considering exempting companies going public in Hong Kong from needing approval from China’s CAC. The discussions are still ongoing, according to a July 15 Bloomberg report, although Beijing regulators have discussed this proposal with bankers recently.

If successful, it could be a clever way for Beijing to have its cake and eat it too.

Citing people with knowledge of the ongoing discussions, “The Cyberspace Administration of China will vet companies to ensure they comply with local laws, but only those headed to other countries such as the U.S. will undergo a formal review,” Bloomberg noted.

Listing in Hong Kong instead of the United States is one way to potentially avoid a big hurdle. Hong Kong has few economic barriers for cross-border transactions, and offers—at least nominally—a staging area for international investors to access the Chinese market.

Some Chinese companies are reconsidering their U.S. IPO plans. Xiaohongshu, a social media company, recently tabled its plans to sell shares in New York this month. LinkDoc, a Chinese medical data provider, shelved its IPO earlier in July. Neither company has elaborated on its plans. Meanwhile, Lalamove, a Chinese logistics company, recently switched its upcoming IPO to Hong Kong from New York, according to a South China Morning Post report.

Morgan Stanley wrote in a note to clients on July 16: “Hong Kong’s contribution to Chinese IPO fundraising will expand in the future. (Domestic) A-shares’ contributions should also rise, but by a lesser degree, given Hong Kong offers better access to international capital and should, in theory, be easier for global investors to trade.

“Meanwhile, the U.S.’s share will likely steadily decline.”

That’s even as the U.S. Treasury Department issued a “Hong Kong Business Advisory” notice warning businesses operating in Hong Kong that they face rising risks to their business as the CCP escalates its clampdown in the city.

Is a Hong Kong IPO equivalent to a U.S. IPO? Of course not. But it could come close. All international investment banks and broker-dealers have some presence in Hong Kong despite its recent political turmoil.

U.S. and foreign investors have continued to pour money into Chinese stocks. In fact, 2021 is seeing a record amount of foreign inflow to Chinese stocks despite everything from political tensions between Beijing and Washington, China’s continued repression of Uyghur minorities, its combative stance over Taiwan, its heavy-handed tactics in Hong Kong, and its economic slowdown.

Offshore purchases of Chinese stocks and government bonds continue unabated. Purchases from January through June 30 were their highest ever, according to a Financial Times analyst.

That’s partly due to financial index providers continuing to include Chinese stocks and bonds in their global and emerging markets indices. And part is due to diversification needs and China’s perceived economic growth after the worst of last year’s COVID-19 pandemic.

Unless the environment drastically shifts, the financial flow toward China and Hong Kong is unlikely to stop.

“Hong Kong remains a critical and vibrant facilitator of trade and financial flow between the East and West,” the American Chamber of Commerce in Hong Kong stated on July 16. The organization counts numerous international banks as members, including Goldman Sachs, JPMorgan, Bank of America, and Wells Fargo.

While the regime in Beijing is making plans to encourage its technology giants to stay closer to home, U.S. regulators appear to be dithering on the delisting of Chinese stocks.

The bipartisan Holding Foreign Companies Accountable Act, passed and signed into law earlier this year, mandates that Chinese companies give U.S. regulators access to audit workpapers. Currently, audit workpapers of Chinese companies are considered national secrets that are prohibited from being shared.

The act gives U.S.-listed Chinese companies three years to comply or face delisting from American stock exchanges.

But the U.S. Securities and Exchange Commission (SEC) hasn’t yet published detailed guidelines regarding compliance and delisting procedures, nor have there been any meaningful conversations with China’s financial regulators. This means the three-year clock hasn’t even begun ticking.

Even if the SEC gathers feedback and it issues detailed procedures by early next year, which would be a feat, audit examinations or delistings wouldn’t occur until 2025 at the earliest.

So far, Beijing regulators appear to be outmaneuvering U.S. regulators on the future of Chinese stocks.

Fan Yu
Fan Yu
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.