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Why China and U.S. Are Clashing Over Stock Listings

Scaffolding across from the New York Stock Exchange (NYSE) in the Financial District of New York, U.S., on Friday, March 5, 2021. Stocks climbed as technology shares rebounded from an earlier selloff. Photographer: Michael Nagle/Bloomberg
Scaffolding across from the New York Stock Exchange (NYSE) in the Financial District of New York, U.S., on Friday, March 5, 2021. Stocks climbed as technology shares rebounded from an earlier selloff. Photographer: Michael Nagle/Bloomberg (Bloomberg)
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Chinese companies in need of capital have long headed to the U.S. stock market to tap deep-pocketed investors, raising more than $100 billion in first-time share sales over the past two decades. The money flow was profitable for company founders, bankers, early investors and new shareholders. All this has changed due to actions by both countries. Ride-hailing giant Didi Global Inc. said it would withdraw from the New York exchange, a stunning reversal as it yielded to demands from Chinese regulators.

1. What action did the U.S. take?

Under a law signed by President Donald Trump a month before he left office, Chinese companies may face delisting starting in 2024 if they refuse to show financial information to American regulators. Rules developed by the U.S. Securities and Exchange Commission to carry out that law require that audits done for Chinese companies be made available for inspection by the U.S. Public Company Accounting Oversight Board, a quasi-governmental body created by Congress two decades ago to improve the integrity of audits. China has refused to let the PCAOB examine audits of its firms, citing national security concerns. The SEC said that while more than 50 jurisdictions work with the PCAOB to allow the required inspections, two historically have not: China and Hong Kong.

2. What action did China take?

New rules unveiled in December require all Chinese companies seeking initial public offerings or additional share sales abroad to register with the securities regulator. The requirements apply to new shares only and won’t affect the foreign ownership of companies already listed overseas. This category includes e-commerce giant Alibaba Group Holding Ltd., which raised $25 billion in a 2014 debut listing on the New York Stock Exchange, at the time the world’s biggest-ever IPO. Any firm whose listing could pose a national security threat won’t be allowed to proceed. Those in industries banned from foreign investment need to seek a waiver before listing. Companies holding data on at least 1 million people seeking “foreign” listings also have to undergo cybersecurity and national security reviews. That word choice, in final rules published Jan. 4, has raised hopes that those seeking to list in Hong Kong could be exempted.

3. Why is China doing this? 

Many of China’s technology firms have near-monopolies in their fields and vast pools of user data, and the Chinese Communist Party appears intent on making sure sensitive data can’t be accessed by foreign regulators. In June, Didi had rankled Beijing by proceeding with its U.S. IPO -- shepherded by a who’s who of Wall Street banks -- even after authorities had expressed concerns over its data security practices. More broadly, the Communist Party appears intent on reining in tech billionaires such as Jack Ma and Pony Ma, whose companies became the largest private enterprises in China with the aid of foreign capital, and hold great sway over nearly every aspect of modern life. Tamping the tycoons’ swagger also aligns neatly with President Xi Jinping’s push to promote “common prosperity” and better harness big data, a strategic asset in China’s showdown with America.

4. What’s been the impact?

Days after Didi’s IPO, China’s cybersecurity regulator told app stores to remove the company’s app, citing serious violations on the collection and usage of personal information. Didi’s share price fell as much as 25% on the first trading day after that. Shareholders sued the company, as well as its directors and underwriters, claiming Didi failed to disclose talks it was having with Chinese authorities about its compliance with cybersecurity laws. Didi said Dec. 2 that it will file for a delisting of its American depositary shares from the New York Stock Exchange and start work on a Hong Kong share sale. It said it would ensure that the U.S. stock will be convertible into freely tradable shares on another internationally recognized stock exchange. Meanwhile, other companies were said to have shelved or delayed their U.S. IPO plans, including health-care firm LinkDoc Technology Ltd., bike-sharing company Hello Inc. and audio-sharing platform Ximalaya Inc. RoboSense, a Chinese developer of sensor technologies used in self-driving cars, decided to list in Hong Kong instead, following others like Lalamove and Xiaohongshu.

5. Is China trying to discourage foreign ownership?

Quite the opposite. China has opened the door to full foreign ownership of financial services companies and local banks in recent years, though strict limits remain on foreign investment in certain areas such as internet, transportation, mining and media companies. The so-called variable interest entity (VIE) structure was developed as a way around those limits. Under a VIE, which was pioneered by now-private Sina Corp. in 2000, a Chinese company receives foreign investment via a shell company incorporated in a place such as the Cayman Islands or the British Virgin Islands, outside the purview of Chinese regulators. Legally shaky and hard to understand, this solution nonetheless proved acceptable for years to U.S. investors, Wall Street and the Communist Party alike -- until now. 

5. What could be coming next?

Stocks worth almost $200 billion currently listed only in the U.S. may need to relocate to exchanges in Hong Kong or the mainland soon, according to Bloomberg Intelligence. Potential candidates include Pinduoduo Inc. and Nio Inc. One expert predicts the U.S. won’t have any major Chinese listings within the next five to 10 years. In November, a commission created by the U.S. Congress to track and anticipate threats from China recommended prohibiting U.S. investment in VIEs linked to Chinese entities or, at the least, more prominently flagging the risks involved to investors. The SEC is already asking more detailed questions of Chinese firms about offshore corporate structures before it will consider allowing them to go public in the U.S. China stopped short of a ban on VIEs when it unveiled its sweeping regulations governing overseas share sales at the end of 2021, but the rules make the structure less relevant because such listings will also be supervised by Beijing.

(Updates with final data security rules in section 2)

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