Compliance
Chinese IPOs In US Boom, But Regulatory Frictions Loom - Editorial Comment

Ironically, information about the boom time in US-listed IPOs of Chinese firms coincided with reports of how the SEC, along with other parties, is wrestling with Chinese firms and policymakers over disclosures and regulatory actions.
Being a news editor gives me plenty of chances to spot unintended
ironies. An example came yesterday when I received an email
stating “Chinese companies raised a record $12.5 billion in 34
IPOs in US capital markets, more than in the entire 2020.”
The email containing these figures, produced by
BuyShares.co.uk, was highly positive about the market,
and its prospects. It continued: “The US capital markets have
been a lucrative source of funding for Chinese companies in
recent years, especially for tech firms looking to benchmark
their valuations against listed peers. Many of them kept their
enthusiasm for US markets in 2020, despite turbulent relations
between the world's two largest economies.”
And: “The Renaissance Capital data showed that last year,
China-based companies raised $11.7 billion through a total of 30
initial public offerings in the United States, the highest amount
of capital since 2014 when Alibaba went public as the biggest IPO
to date.”
As the email suggested in reference to “turbulent relations”
between the US and China, there are a lot of flies in the
ointment. As reported late last week (Reuters, others),
the US Securities
and Exchange Commission will not allow Chinese companies to
raise money in the US unless they fully explain their legal
structures and disclose the risk of Beijing interfering in their
businesses. This statement follows talks (see
reports here) reportedly held between US banks and Chinese
regulators about Beijing’s regulatory moves against several
sectors, including Western firms providing education services to
China. The actions prompted a slump in stocks of various firms,
hitting portfolios of investors.
Refinitiv figures show that Chinese listings in the US have
reached a record $12.8 billion so far this year. But as
Reuters reported (30 July), deal flows slowed
substantially in July after Chinese regulators banned
ride-sharing firm Didi Global from signing up new users just days
after its IPO. SEC Commissioner Allison Lee has reportedly said
that Chinese companies listed on US stock exchanges must disclose
to investors the risks of the Chinese government interfering in
their businesses as part of their regular reporting
obligations.
Beijing’s actions are a reminder that the world’s second-largest
economy is still in some key respects an emerging, rather than
fully developed, market. And, as I recall over the years, one of
the issues emerging market investors have to remember is not just
return on their investments but return of their investments.
Regulators who suddenly impose rules, however rational or
defensible, should do so clearly and telegraph their intentions.
It may be that an authoritarian state such as China thinks it can
act as it does, given the weak state of the global economy and
demands for Chinese capital. But Chinese policymakers are not,
surely, oblivious of the risks. China has, after all, been
opening its capital markets in recent years to foreigners. If it
wishes that happy state to continue, its rules must be clear,
consistent and introduced in a measured way. Rival financial
centres, such as London’s City, rose to greatness precisely
because of such qualities.
The next time I come across enthusiastic press releases about
initial public offerings, I’ll bear such considerations in mind.