China proposes tighter rules but no ban on smooth sea

BEIJING, Dec 24 (Reuters) – China’s security organization on Friday proposed tighter rules governing Chinese listed companies abroad, which it said would improve oversight while allowing them to continue doing so, the latest in a series of regulatory moves Beijing in 2021.

The draft rules, which were carefully awaited by investors and posted by the China Securities Regulatory Commission on its website, extended CSRC’s oversight of offshore listing to Chinese companies with variable interest structure (VIE).

There was much uncertainty among investors and Chinese companies about how tightening the new rules should be.

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“China is tightening the screws on the smooth sea but not closing the pipes completely,” Andrew Collier, managing director of Orient Capital Research, said of the plans.

The CSRC said the existing rules governing the sea list had become obsolete and proposed new ones to reflect China’s desire to be more open and “not about tighter politics”.

Previously, the regulator would only examine companies incorporated on shore in China that proposed a sea list, such as in Hong Kong.

Beijing unleashed a major regulatory crackdown this year under President Xi Jinping, including tightening on anti-competitive behavior, banning private tuition groups and reducing a debt-ridden meal by property developers in a wide-ranging campaign that has seized domestic and global markets. . .

VIEs have been mainly used by listed companies on the foreign exchange market, primarily the United States, to avoid Chinese regulations that restrict foreign investment in sensitive industries such as media and telecommunications.

Most listed Chinese offshore technology companies, including Alibaba Group Holdings and JD.com Inc., use their structures, which give them more flexibility to raise capital, while circumventing the investigation and long-term IPO process that companies locally incorporated to be attended to. .

“The real key is how much data to keep, where the servers are, and whether the US or China has responsibility for accounting,” Collier said.

The CSRC said the proposed registration process should take up to 20 business days if proper materials were submitted.

It will also require international banks to submit a sea list of a Chinese company to register with the CSRC.

DIDI IMPACT

The offshore IPO provided an alternative source of capital for Chinese companies and a New York listing was seen as an honor badge for many.

But Beijing has increased oversight of overseas listings since the $ 4.4 billion first public offering (IPO) of ride-haling giant Didi Global Inc. (DIDI.N) and the proposals on Friday were not as harsh as some had expected.

Chinese companies have raised about $ 12.8 billion from the U.S. list in 2021, according to Refinitive data, but their contracts were suspended after the first Didi in New York in early July.

The CSRC said Chinese regulators had respected the choices companies made on their listings and rules should not be applied retroactively, adding that it would not consider whether companies met the requirements listed overseas. .

But the Chinese government can order a company to dispose of its assets or businesses if its offshore list endangers national security, according to the proposed new rules.

The announcement came as U.S. markets closed Friday for the Christmas holiday season.

In a VIE, a Chinese company set up a offshore company for an overseas listing that allows foreign investors to buy into it.

The offshore company entered into a series of contracts with the owner of the local Chinese company, which operates the business in China, to gain 100% economic interest in this business, analysts have said previously.

Chinese IPOs across the global market reached a record $ 100 billion this year, Refinitiv data showed.

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Reported by Kane Wu, Samuel Shen, Selena Li, Julie Zhu; Beijing News Room; Written by Scott Murdoch and Tom Daly; Edited by Alexander Smith

Our standards: Thomson Reuters Trust Principles.

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