Mar 09, 2023 07:13 PM

Opinion: Why Did China Revamp Its Overseas IPO Rules?

China completed the rollout of a registration-based IPO system in its A-share market. Photo: VGC
China completed the rollout of a registration-based IPO system in its A-share market. Photo: VGC

Feb. 17 marked one of the most important milestones in the regulatory overhaul of China’s stock market. The country finally completed the rollout of a registration-based IPO system in its A-share market and issued new supervision rules for overseas listings by Chinese companies. The latter, which had been open for public feedback since December 2021, essentially expands the registration-based system to cover overseas listings.

(Editor’s note: The registration-based IPO reform fundamentally lets the market make the choices under a framework of tightened market and legal constraints. The registration-based approach has information disclosure as its core, making it more transparent and predictable compared to the previous system, which, from approval to pricing, was heavily controlled by the China Securities Regulatory Commission, also known as the CSRC.)

Prior to the changes, the cornerstone policy document regulating overseas listings was the Special Provisions of the State Council Concerning the Overseas Securities Offering and Listing by Limited Stock Companies, which was promulgated by the State Council in 1994.

How should we interpret the new rules for overseas listings, and what should companies do to comply with them?

Of the key aspects covered in the reform, first is bringing “small red chip” indirect listings under regulatory oversight. But the new regime goes far beyond that.

(Editor’s note: Private Chinese mainland companies listed overseas often use the “small red chip” model. The variable interest entity structure used by such companies, including Alibaba Group Holding Ltd. and Didi Global Inc., when they sold shares in the U.S. falls under this model. Before the latest reform, the model allowed companies to get around regulations that ban or restrict direct foreign investment.)

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Caixin Explains: What China’s Overhaul of Overseas IPO Rules Is All About

Policy goals

In my opinion, the new rules on overseas listings are mainly driven by three goals.

The first is security. The reform will prevent some companies from intentionally bypassing domestic regulators and then listing overseas, which may violate China’s industrial policies or even endanger national security.

The second goal is to effectively manage reputational risk of Chinese companies. There have been repeated accounting fraud scandals involving U.S.-listed Chinese companies. Under the new framework, Chinese mainland companies that seek to list overseas are required to comply with relevant Chinese laws, including the Company Law and the Accounting Law, when regulating their corporate governance, as well as financial and accounting conduct.

A second measure designed to prevent reputational risks is to raise the compliance thresholds for overseas listings. Companies seeking overseas listings must submit a detailed report to domestic regulators, while their law firms must issue a comprehensive legal opinion covering corporate governance, business operation compliance, taxation, environmental protection, safety of production, major contracts, assets, and more.

While similar rules were applied to companies seeking a direct listing in Hong Kong’s “H-share” market in the past, they have been expanded to cover “small red chip” indirect listings.

H-share companies may not be affected much by the updated thresholds as they have long been under the supervision of the CSRC, but the new requirements pose a significant challenge to firms seeking an indirect listing through the “small red chip” model. The latter involves an overseas-incorporated company with business, assets, markets and ownership primarily on the Chinese mainland.

The new rules also require securities companies to sign a letter of commitment guaranteeing that the materials submitted are authentic, accurate and complete, marking the first time that overseas securities firms have been brought under China’s regulatory oversight. It is also the first time that Chinese law firms engaged in the “small red chip” business have come under CSRC supervision.

The hope is that raising the thresholds will improve the overall compliance of Chinese firms listed overseas, which will in turn boost their reputation and help high-quality companies in raising funds overseas.

The third policy goal is to prevent listings by companies not suitable for the public market. The government has already banned private tutoring firms from listing. Other sectors could face the same fate.

Policy flexibility

We can also compare the goals of China’s new overseas IPO framework with the A-share market’s IPO reform, through which we may figure out the aspects of overseas listings that are not particularly in regulatory focus.

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Update: Seven Things to Know About China’s Latest IPO System Overhaul

First, the registration-based IPO system overhaul in the A-share market highlights that the capital market should serve China’s national strategy. But for overseas listings, as long as the companies don’t breach the goals mentioned above, I see no reason why their fundraisings should not be approved.

Secondly, I think that the supervision of overseas listings does not pay special attention to financial indicators, unless fraud is involved. By focusing on issues such as compliance, Chinese regulators are leaving other scrutiny to overseas authorities and the market.

Lastly, I think that the supervision will not pay special attention to issues such as offering prices, and so not concern itself with whether the prices are set excessively high or low.

Li Shoushuang is a senior partner at Beijing Dentons Law Offices LLP.

Contact translator Zhang Ziyu ( and editor Jonathan Breen (

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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