Since the Didi affair in June, China has wanted to more firmly control companies wishing to go public abroad. Without going so far as to ban this possibility altogether, the country is drastically making the process more complex, reports Bloomberg.
The announced end of VIE?
In China, many sectors of the economy have been blacklisted. The companies concerned are theoretically prohibited from soliciting investments from abroad. Identifying authorized sectors would probably be less tedious, on the list are agriculture, manufacturing, wholesale and retail trade, transport, research… and software and information technology services.
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It is possible to obtain an exemption to override this prohibition. On December 27, the National Development and Reform Commission as well as the Ministry of Commerce decided to tighten the conditions for obtaining these privileges. Foreign investors will not have the right to participate in the management of the company, foreign participation will be limited to 30% and a single investor may not own more than 10% of the shares.
Chinese companies have long found a way to avoid barriers to going public abroad. It goes through VIEs, entities with variable interest. The company transfers its profits to an offshore entity which then offers foreign investors to acquire shares. This solution was notably adopted by Alibaba or Tencent.
There was talk for a time of banning VIEs, finally China prefers to empty this indirect route of its substance. The China Securities Regulatory Commission on December 24 proposed to require all companies wishing to go public overseas to register with it. It would become a regulatory authority, deciding whether a particular IPO poses a threat to national security.
These measures are in addition to the cybersecurity review put in place following Didi’s IPO at the end of June. Any company initiating procedures similar to Didi with more than one million users must submit to this procedure.
China wants to keep its businesses
During the same period, in July 2021, the Securities and Exchange Commission announced that it wanted to crack down on Chinese VIEs. The American stock market regulator wants to put in place a law to force foreign companies to open their books. What to reinforce the mistrust of Beijing.
The unstable regulatory situation in China, and to a lesser extent in the United States, has already dissuaded some start-ups from going public. Bloomberg mentions podcast company Ximalaya or lifestyle platform Xiaohongshu. If rumors evoked the arrival of ByteDance, the parent company of TikTok, in New York, the company has silenced them.
At the beginning of December Didi officially announced her departure from the New York stock exchange in favor of the Hong Kong stock exchange. This example is very particular, but the attitude of China suggests a withdrawal into oneself against a background of tension with the United States or the certainty that its companies no longer need American capital. The truth is probably somewhere in between.