Jan 15, 2019 03:36 AM

High-Tech Board May Provide No Path Home for Companies Like Alibaba

Sources said regulators have nearly finished compiling draft rules for the new board. Photo: VCG
Sources said regulators have nearly finished compiling draft rules for the new board. Photo: VCG

Red-chip companies and those that have listed abroad using a variable-interest entity (VIE) structure will probably find a dead end in China’s proposed high-tech board as a path to a domestic listing.

The high-tech board, proposed by President Xi Jinping in November, will find it “almost impossible to accept” applications from red-chip companies or those with a VIE structure, at least in the early stages, according to an internal discussion organized by the Shanghai Stock Exchange’s offering and listing center Friday afternoon, a source with knowledge of the matter told Caixin.

The remarks came after previous media reports said authorities were still considering the issue.

The source said regulators have nearly finished compiling draft rules for the new board and are expected to release them soon for public comment.

Red-chip companies are enterprises that are incorporated offshore and are listed in Hong Kong but have most of their operations on the Chinese mainland and are usually controlled by entities there.

The VIE structure, which is similar to the red-chip arrangement, is adopted by many Chinese tech businesses such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. when they sought to raise funds abroad through ways like a listing. The firms choose the structure to get around China’s rules restricting foreign investment and ownership in certain sectors including internet businesses and value-added telecommunications services.

The Chinese government tolerates both structures. However, companies that use them are effectively barred from carrying out initial public offerings on mainland stock exchanges.

“A large number of unicorn firms use arrangements similar to the VIE structure,” said another source. “Companies with such structures will be regarded as foreign firms when they come to raise funds in China. It’s not as simple as Chinese companies going public on the high-tech board. The high-tech board is not an international board.”

This individual said some government agencies were opposed to allowing companies with these arrangements to list on the proposed board.

The proposed high-tech board would test a long-touted mechanism based on a registration system rather than regulatory approval. The plan is regarded as part of the government’s efforts to expand access to funding for startups and fast-growing companies in strategic or emerging industries. Such a board could also become an additional attraction for foreign investors who are being encouraged to pour money into the domestic stock market.

To win a brokerage recommendation to list on the high-tech board, companies need to meet four requirements, according to an internal circular seen by Caixin: They must own the intellectual property rights of their products so that the use of the relevant technology will not be restricted by an international technology boycott; the relevant technology must be the company’s main driver of income growth; the company must have a mature research and development system and team; and the company must have a mature business model.

Brokerages are encouraged to recommend enterprises in sectors such as integrated circuits, artificial intelligence, cloud computing, big data, software, ship-building, high-end rail transportation, maritime engineering, high-end numerically controlled machines, robotics, new-energy cars and biotechnology, and companies providing services for these industries, according to the document.

The story has been corrected to reflect that red-chip refers to a type of listed company, not a type of corporate structure.

Contact reporter Fran Wang (

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