Chinese IPOs and the US Market – Trials and Regulations

Written by Dimitrios Galatas, recent graduate from the University of Warwick

China has, in recent times, become the flagship nation for technological advancement. As expected from a nation with such a title, there have been a series of Chinese company listings onto US exchanges, which aim to take advantage of willing investors looking to get into this budding market. These IPOs however have been falling apart and are raising investor concerns. This article will look to explain why this has happened, what the future could hold for China and for investors, and how law firms will be affected by this trend.

The Chinese Company Listing Spree

Within the first half of 2021, there have been 34 Chinese firms listed on US exchanges (including Didi Chuxing Full Truck Alliance, and RLX Technology), which have raised approximately $12.4bn. These are all-time high numbers for both nations when compared to the 18 Chinese firm listings, raising $2.8bn within the same period of last year. Such record-breaking levels of fundraising have accordingly generated a record-breaking windfall for Wall Street, with investment banks such as Goldman Sachs and Morgan Stanley generating approximately $460m in fees.  Despite this however, over two-thirds of Chinese companies are currently trading below their IPO prices.

A large component of the IPO failures is due to Beijing’s crackdown on regulation upon it’s flagship sectors, including technology, logistics and mobility. Such an emphasis on regulation has already been put into practice by Beijing following their announcement of an investigation into potential data security breaches at ride-hailing group Didi, and logistics company Full Truck Alliance. Beijing stresses that the purpose of such regulations are to emphasise long-term valuations of the IPOing companies. with the Cyberspace Administration of China (CAC) also preventing new users from being able to register on these apps.

Case Study: Didi Group

Didi is worth looking at in particular; being the largest Chinese float in the US since Jack Ma’s ecommerce group Alibaba, with Didi raising $4.4bn in New York last week. The CAC’s investigation into potential cyber security breaches within the group has caused the share price of Didi to fall sharply, despite still being traded above its IPO price. The CAC also imposed a number of punitive measures on the firm, preventing new users from being able to register on the app as well as ordering it to be removed from domestic app stores. This comes following allegations that the company had violated laws regarding the collection and use of personal data.

This is also reflective of China’s more general concerns about cross-border illegal securities activity, stating that they would impose stricter regulations for companies listing abroad due to the transfer of sensitive information. China wish to establish a system for the “extraterritorial application of China’s capital market laws” as they are at conflict with US securities regulators regarding the US ‘preference to be able to access audit files of Chinese companies listed in the US. Tensions further rose with the US passing a law which gives Chinese companies 3 years to comply with this requirement or they risk facing delisting. China retaliated to this by passing a further piece of legislation, imposing a requirement that Chinese entities need government authorisation before providing any China-based data to foreign judicial or law enforcement agencies.

The Future: What This Means for Investors and Law Firms

Going forward, investors and bankers alike anticipate that the pace of activity regarding Chinese listings will slow in the short-term as investors come to terms with Beijing’s intense supervision and regulation of firms listed in foreign markets. However concerns do not end there. Due to the combined effects of Beijing’s increase in regulatory scrutiny and investor concern/uncertainty, this would mean that Chinese companies which were initially planning to list in the US in the near future would have to postpone or abandon their hopes at an IPO altogether. This is because a lack of investor faith, alongside the potential data security implications of Chinese firms listing abroad using Beijing’s new regulations that companies are broadly unprepared for, could severely devalue the share price of the company at IPO. This is especially impactful for both nations, as US capital markets have been a key funding source for Chinese firms within the last decade. Academics argue that this emphasis on data regulation is ‘the path to a world where companies have to localise their data and are audited by local regulators only’, as China are reluctant to allow foreign governments to access their data.

For law firms with satellite or branch offices in China, there may be a large political pressure on the firms to advise their clients a certain way, and abide by the Chinese government’s requirements. Such an element of political pressure may be unnerving to the partners and associates of the firm, however it is clear that this has become part and parcel of working in China. Other international counterparts of these firms should also be careful regarding any statements or opinions they divulge regarding the Chinese government’s requirements. Failure to do so could result in an international sanction being placed upon the firm, as demonstrated in the case of Essex Court, which would have the effect of diminishing the reputation of that firm within the Chinese legal market.