China’s crackdown on U.S. stocks threatens the $ 2 billion market


Beijing has sent shockwaves through global financial circles with plans to tighten restrictions on overseas listing of Chinese companies, in a development that could threaten more than $ 2 million worth of shares on Wall Street .

But the vague and widespread nature of the announcement Tuesday, which follows a repression on the Didi group, listed in New York, has caused confusion among traders and investment bankers. Chinese companies are already reconsidering U.S. listings, hitting a lucrative business for U.S. banks.

What did China announce?

The announcement came from China’s top leaders and said the reforms were “guided by Xi Jinping’s Thought on Socialism with Chinese Characteristics for a New Era.”

The guidelines threaten stronger oversight of U.S. depository receipts, which Chinese groups use to list in the United States, and “effective measures to address the risks and emergencies arising from Chinese ADR companies.”

Yi Huiman, chairman of the China Securities Regulatory Commission, called it “a new starting point for the modernization of [the country’s] system for capital market governance ”.

But bankers and experts said the announcement indicated that listing the U.S. would become much more difficult for Chinese companies, especially those whose businesses rely heavily on data – if they were allowed to.

“Could you see a direct ban on US stocks? Yes,” said Fraser Howie, an independent analyst and expert on the Chinese financial system. He added that the “variable interest entity” structure used by Chinese groups to issue shares in New York could also come under stronger pressure from Beijing. These are offshore entities used to circumvent foreign investment rules in China for certain sectors.

There are nearly 250 listed Chinese companies in New York with a combined market capitalization of $ 2.1 tn, according to the US-China Economic and Security Review Commission.

What’s behind the move?

The guidelines clarify that data is a matter of national security, a concern underscored by the launch of a investigation on Didi by the Cyberspace Administration of China (CAC) a few days after its initial public offering of $ 4.4bn last week.

A person close to Didi said the company had been advised by the CAC to delay its insertion until it conducted a data security review. Didi denied knowing before his IPO that regulators planned to intervene.

Zuo Xiaodong, CAC adviser, told local media that a U.S. law passed in December that imposes Chinese companies listed in the U.S. submitted to American verifications could result in a loss of important data beyond the country’s borders

Yet legal experts say there is no law that allows the CAC or other agencies to intervene in overseas lists for data security reasons, hence the need to tighten regulations.

“In the past most Chinese companies were listed in overseas markets through an offshore company. [a VIE], which is completely out of the reach of Chinese regulators. . . In the future there may be some kind of reporting and review process, ”said Luo Zhiyu, a colleague of DeHeng’s legal office.

In March, the Securities and Exchange Commission began issuing rules threatening to expel foreign companies from U.S. exchanges if they did not comply with U.S. control rules for three years. A person involved in negotiations said the United States had rejected a suggestion by China that its regulators conduct audit inspections and forward its findings to the U.S. Public Company Accounting Supervisory Board.

The new Chinese guidelines point to the need to “further deepen cross-border audit supervision cooperation,” suggesting that the country remains open to cooperation. But this confused legal experts. “There is no ongoing control cooperation, so there is nothing to deepen,” said a U.S. regulatory attorney.


Paul Leder, former director of the SEC’s Office of International Affairs who was directly involved in negotiations with China over the audit, said the language of cooperation was “encouraging… But the truth is. problem is whether they are willing to engage in the kind of direct supervision of foreign control firms required by U.S. law. ”

How much is the impact?

Bankers and analysts have said the new regulations could threaten billions of dollars of Chinese technology listings planned for New York, offering a greater market depth than Hong Kong and fewer capital restrictions than Shanghai or Shenzhen.

“There are a number of Chinese companies that we can see that are definitely rethinking whether they should go to the United States…. of U.S. investment.

“Every deal should be made with a huge discount,” said a colleague of a leading law firm in the United States.

The head of capital markets at a Wall Street bank in Hong Kong said bankers were preparing for a “tough” second half of the year.

Who are the winners and losers?

The biggest losers are probably the Nasdaq and the New York Stock Exchange, where Chinese IPOs have raised more than $ 106 billion, according to Refinitiv data. These lists have become central to Wall Street banks ’revenues in recent years, with about $ 24 billion raised in the last 18 months.

“For companies with offshore fundraising needs, their best listing destination will be Hong Kong from now on,” said Bruce Pang, head of research at China Renaissance, an investment bank.

The role of foreign venture capital and private equity in financing Chinese start-ups means that technology groups will remain under pressure to list outside of mainland China, beyond the reach of their rigid ones. capital controls.

“For larger companies and the [IPOs] who are ready to go. . . you will go immediately to Hong Kong, ”said the head of capital markets in Asia.

What happens next?

The wide language of the guidelines means regulators could take a light touch on the application, but those speaking to the Financial Times were skeptical.

“Regardless of the direct impact on Didi, the listing in the United States will now be a cautionary tale for Chinese companies and U.S. investors,” the U.S. law firm said.

“There will be a growing number of companies that will be under pressure to pull off the list [from the US] and to make a repurchase of shares and a simultaneous listing in Hong Kong, ”said Howie, China’s financial expert.

He added that the leaders of the large Chinese technology groups listed in the United States could face serious consequences if they resisted any reason for delisting. “I would be very worried if I were a Chinese internet baron who could find me in a cell.”

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