Chinese venture capitalists look elsewhere as US IPO regulations tighten

China’s cyberspace regulator on Saturday proposed that any company with data on more than one million users go through a cybersecurity exam before registering overseas. The regulator, whose influence in China has grown rapidly, said public comment on the proposed rules would end on July 25.

This followed an announcement last Tuesday by the highest executive body and central committee of the Communist Party of China on cracking down on illegal securities activities, which included a more in-depth review of private equity and venture capital funds. , as well as fundraising abroad through actions.

“There is no impact on exits, direction of investment and stage of investment” for a company like ours, said on Thursday Michael Xu, managing partner of Chinese company CEC Asset Management, saying reference to increased securities regulation. This is according to a CNBC translation of his remarks in Mandarin.

The only aspect the company should pay more attention to is whether the investment projects had shareholders without a clean record with the securities regulator, Xu said.

Big tech giants like Alibaba and Tencent, which have backed a significant number of US listed companies, have also come under scrutiny in China’s crackdown on monopoly practices last year. .

Investor interest in China has increased. The value of private equity-backed venture capital transactions and buyouts reached $ 74.3 billion in the first quarter of this year, according to Preqin. That’s the most for a six-month period since the first half of 2018.

Getting returns on such investments is the top priority, said Jeff Wu, a China-focused partner at Silicon Valley-based Pegasus Tech Ventures. In light of the latest market developments, he said he was looking to back out of investments through Hong Kong listings or specialist overseas acquisition companies.

However, mainland China has struggled with its own efforts to keep tech IPOs at home. Authorities launched the Star Board in Shanghai in July 2019, with a registration system for IPOs, rather than regulatory approval.

This registration-based IPO process has stalled. As of June 20, EY said more than 500 companies were on the Chinese securities regulator’s waiting list to go public on Star’s board of directors and an equity-focused board of directors. technology in Shenzhen called ChiNext.

“Chinese investors are not yet sophisticated enough and the legal environment is not mature enough to accommodate such a registration process,” said Zhu Ning, professor of finance at Tsinghua University.

He noted that so far China’s securities law is “much less punitive” than it is in the United States and that recent securities regulations are “consistent with the continued efforts of Chinese authorities to improve the listing requirements and standards.

“It is important for investors to keep in mind that China is still an emerging economy. No matter how fast it grows, the institutional context is still not the same,” he said.

The Chinese government’s increased control over the listing of local companies in the United States comes as tensions between the two countries erode the economic and financial ties that have been forged in recent decades.

Under the Trump administration, the White House began to demand less U.S. investment in Chinese assets. Since President Joe Biden took office in January, his administration has maintained a firm stance on China.

Consulting firm Eurasia Group said in a note this weekend that the fallout from Didi’s listing would intensify US political pressure for restrictions on Chinese stock offerings. “In short, the tap of Chinese IPOs in the United States will likely run out,” the authors said, noting that several Chinese companies have already canceled their plans for IPOs in the United States.

Previously, Chinese companies had gone public in the United States at a record pace, accounting for 15% of the U.S. IPO market in the first half of the year, according to Renaissance Capital.

One strategy Chinese companies have followed recently is listing in the US and Hong Kong – hedging against delisting risks while capturing a large pool of institutional investors.

This trend is likely to continue, said Ming Liao, founder of Beijing-based Prospect Avenue Capital, which has plans to list its U.S.-invested companies. different agencies.

As investment funds look for other ways to get out of their holdings, the Chinese government’s control over stock offerings is not disappearing.

Beijing said in the five-year national development plan adopted in March that authorities aim to “fully implement” a registration for issuance of shares and improve the “quality” of listed companies, while strengthening efforts to ensure national security and repress monopoly behavior.

Ringo Choi, EY’s Asia-Pacific IPO leader, said he expects global IPO uncertainty to persist in the near term, as clarification of some policies could lead to other regulations. He noted that in China, the actions of one regulator may compel another department to take similar action.