Opinion: China-U.S. Spat Over Cross-Border IPOs Will End Up Hurting Both

Beijing’s sudden crackdown on Didi and stricter policy stance on Chinese IPOs bound for the U.S. is choking off access to the American capital market. Dazed and confused, a number of firms now find themselves in a tug of war between China’s desire to limit extraterritorial data transfer, pitted against America’s directive for audit data files of foreign companies listed on its exchanges. Unwittingly, Didi Global Inc. has become the poster child in the opening salvo of a much wider campaign that seeks to maintain data sovereignty, penalize noncompliant securities listings, while enhancing national security. And firms that lord over massive data stores may end up in a sea of trouble if not subjected to newfangled data security reviews.

The backlash against Didi was swift but not unexpected. In April, the ride-hailing giant was one of over 30 tech firms, including e-commerce titan JD.com Inc. and Meituan, that were given a warning and handed a limited reprieve to rectify their erroneous market practices. Coupled with Jack Ma’s public dressing-down and the suspension of Ant Group Co. Ltd.’s IPO, investors should have been in a state of high alert. The warning signs were there.

As Beijing slams on the regulatory brakes, the IPO pipeline may likely grind to a screeching stop, at least in the short-term. The cross-border listing mechanism, wobbly from regulatory tremors counts several canceled listings as its first casualties — medical platform Linkdoc Technology Ltd. has tabled its $200 million New York Stock Exchange IPO, as well as Keep, China’s most popular fitness app. More IPO cancellations will follow.

2021 was set to be a banner year, with over $12 billion raised from Chinese firms to date. Bankers who have seen their coffers swell by hundreds of millions of dollars in listing fees are terminating roadshows, and now fret over the pall of uncertainty cast over the rest of the year. This also poses a nightmare scenario for SPACs, many of whom can see an expiration date fast approaching in the rearview mirror and have yet to find a suitable marriage partner. Lack of enticing deals in the U.S. has forced SPACs to shift their gaze to Asia, with China a main focal point. But after the Didi fallout, merging a Chinese firm into a SPAC shell may prove to be too risky for some. As for the lucky few companies from the Middle Kingdom that are eventually given the nod to list in the U.S. — they may be subject to protracted regulatory reviews and discounted valuations, making them less attractive relative to firms in other high-growth emerging markets. Going public is not what it used to be and may force some firms to stay private longer or find alternative listing venues.

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Failure for Beijing and Washington to reach a deal will come with a high price. China’s entrepreneurs stand to miss out, cut off from the vast depth and breadth that U.S. exchanges offer. Meanwhile, American bourses and investors will be the biggest losers as they are excluded from investing in what is still one of the fastest growing markets in the world. The greater tragedy is that a critical pillar of collaboration and understanding between both nations is about to crumble.

Can China handle the fallout? Yes, for the most part. Its finance sector is a hulking mass, boasting the largest banks in the world by assets, dynamic stock exchanges in Hong Kong, Shanghai and Shenzhen and credit markets that continue to draw in investors, despite the much-publicized bond defaults last year. Girth along with quality of reform and deepening financial product sophistication are now a hallmark of its capital markets. The STAR Market — China’s version of a Nasdaq-style tech board — helps cultivate startups that bolster the real economy. Streamlined listing rules fast-tracked the IPO mechanism, generating a tidal effect, pulling secondary listings back home. But Beijing knows its own limitations. The Chinese mainland’s markets are not on par with New York or London’s, despite the great strides made in recent years, and has granted foreign financial institutions an opportunity in shaping China’s capital markets, albeit to a limited extent.

For U.S. lawmakers, eager to prevent a repeat of a Luckin Coffee scandal, the finely tuned scale for implementing common sense rules that protect investors while conducive to the long-term success of companies has been toppled over by Washington hawks calling for capital market restrictions, keen on a broader societal decoupling. Nonsensical proposals only serve to keep foreign listings at home.

Maintaining the integrity of an international listing process and strengthening international enforcement and collaboration is a joint concern. But the disconnect between both capitals highlights the complexity in regulating cross-border IPOs.

The Didi saga demonstrates that officials are prepared to step in and quarantine emerging risks as China readies itself for the next phase of economic growth. Consistent with the 14th Five-Year Plan unveiled earlier this year, regulators will hold ample sway to curb market excesses and stamp out hazards when they come into view. China will collaborate when it can and admonish threats when cornered. Regrettably, what ought to be common sense cross-border regulation has become entangled in a larger web of data sovereignty and national security that may be too complex to unravel.

Joel A. Gallo is CFO at ETAO International Group and Adjunct Faculty at New York University.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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