Caixin
Aug 02, 2021 08:54 PM
FINANCE

After Market Turmoil, China Securities Regulator Pledges to Make IPO Policies More Predictable

The China Securities Regulatory Commission headquarters in Beijing on June 10. Photo: VCG
The China Securities Regulatory Commission headquarters in Beijing on June 10. Photo: VCG

China’s top securities regulator has pledged to make policies more predictable and transparent in response to its U.S. counterpart requiring additional disclosures for Chinese IPO risks.

The China Securities Regulatory Commission (CSRC) will communicate closely with relevant authorities to properly handle the relationships between investors, businesses and regulators, according to an official statement (link in Chinese) on Sunday.

The remarks show how Chinese regulators are trying to reassure overseas investors after Beijing’s recent regulatory moves to rein in tech companies, specifically ride-hailing platform Didi Global Inc., and the private tutoring sector, triggered massive market sell-offs over the prospects for U.S.-listed Chinese firms, The Nasdaq Golden Dragon China Index, a measure of the market cap of U.S.-listed Chinese firms, dropped 22% last month.

U.S. regulators have warned about risks to investors and the companies themselves arising from U.S.-listed Chinese firms’ use of variable interest entity (VIE) structures, a corporate governance framework that allows China-based companies to raise funds on overseas stock markets through offshore shell entities. On Friday, the U.S. Securities and Exchange Commission (SEC) directed Chinese firms to disclose risks and regulatory uncertainties concerning their VIE structure when seeking U.S. listings.

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“I have asked staff to ensure that these issuers prominently and clearly disclose … that the China-based operating company, the shell company issuer, and investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance,” SEC Chairman Gary Gensler said in a statement on Friday.

In response, the CSRC called on Sunday for more communication with the U.S. regulator to properly address issues concerning oversight on U.S.-listed China-based companies to ensure a stable policy environment.

To further placate investor concerns, the state-run Xinhua News Agency last week published a commentary penned by one of its reporters, saying that China has accelerated the opening-up of its capital markets, and arguing that the CSRC is supportive of companies choosing where to list based on their business development needs. Then on Friday, a Politburo meeting of China’s Communist Party vowed to (link in Chinese) perfect rules on Chinese firms listing overseas.

Chinese stock markets rallied on Monday following these signals from the government, with the benchmark Shanghai Composite Index (000001.SH) gaining 1.97%.

Analysts and investors see both uncertainties and opportunities from what Chinese policymakers have in store and how Chinese businesses will respond. The current regulatory environment is raising questions over policy transparency, willingness to support foreign capital investment in tech companies, and government influence over private companies, analysts at J.P. Morgan wrote in a note on Friday.

The J.P. Morgan analysts are advising investors to stick with China’s onshore stocks, companies in industries that have policy support, and tech companies with sustainable profit track records, as more turbulence could be in store. “We think that more oversight is likely, but that it is unlikely that Beijing will immediately disallow VIEs.”

Ray Dalio, founder and co-chairman of global hedge fund giant Bridgewater Associates LP, wrote in a Saturday note to investors that China has supported rapid but steady development of capital markets and openness to foreign investors, although regulators can create confusion when trying to strike the right regulatory balance in fast-changing markets. He declared: “I encourage you to look at the trends and not misunderstand and over-focus on the wiggles.”

Contact reporter Guo Yingzhe (yingzheguo@caixin.com)

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