The China Securities Regulatory Commission told CNBC on Friday that China's forthcoming rules on overseas IPOs will apply to Chinese companies that want to list in Hong Kong.
In an exclusive interview with CNBC, the commission's director-general of the international affairs department, Shen Bing, spoke about what draft rules will mean for Chinese companies that are planning to list in the U.S.
In a wide-ranging interview, Shen said that it included Hong Kong.
The red chips category, which previously did not need the CSRC's approval, will now be applied to Chinese companies wanting to offer H-shares in Hong Kong. Red chips are Hong Kong-trade shares of companies that conduct most of their business in the mainland but are incorporated outside China, and H shares are stocks issued by mainland China companies that trade in Hong Kong.
The rush of Chinese IPOs to the U.S. has stopped. Beijing has changed the process for domestic companies to raise money outside its borders through stock offerings.
National security is one of the reasons cited for the changes, as well as blacklisting some Chinese companies and moving to reduce U.S. investor exposure to stocks tied to the Chinese military.
The Cyberspace Administration of China will require data security reviews for certain companies before they are allowed to list abroad.
The public comment period on the draft rules for the CSRC and State Council ended on Sunday. The commission said it would respond within 20 working days of receiving all materials if the rules are enacted.
The draft rules state that overseas listings are not allowed.
The rules would prevent a Chinese company from listing overseas if it operated in an industry subject to restrictions or bans on foreign investment.
The CSRC's priority is to open China's market further to foreigners.
There was a rush of Chinese companies going public in New York in the spring of 2021.
Didi was ordered to suspend new user registration and remove its app from app stores in China just days after its $4 billion U.S. IPO.
One reason for the probe was to maintain national security. Didi can't add new customers at the moment.
We noticed the slowdown of overseas listing since the second half of last year, and we hope that with these new rules, things will resume.
In December, the company said it would delist from the New York Stock Exchange and pursue a listing in Hong Kong.
We hope the companies will resume listing after the new rules are in place.
The U.S. market has a strong inclusiveness for new start-ups in new industries, even as markets in Greater China have been catching up.
The sudden suspension of the IPO of the Ant Group shook the confidence of foreign investors. Less than a day before the record-setting listing in Hong Kong, the news came.
One of the purposes of the new rules is to avoid such a situation, with more communication and more clear rules.
Chinese IPOs overseas can use the VIE structure if they comply with the rules.
A VIE creates a listing through a shell company, which prevents investors in the U.S.-listed stock from having majority voting rights over the Chinese company.
Chinese companies have used the structure to list in the U.S.
The commission is working with relevant departments to include more detailed guidance on how companies should communicate with regulators in order to list overseas.
In this course, we may give regulatory advice to the firms so that they don't waste time doing something that wouldn't work. The CSRC's response time would be different from other departments.
When the final rules would come out was not specified.
He said that the procedural process for approval would be efficient because of the high degree of consensus over the rules.
The proposed rules may increase compliance issues for foreign banks that want to work with Chinese IPOs.
Investment banks need to alert the CSRC when they enter the business of Chinese IPOs, and annually disclose how many of those overseas listing projects they completed, according to the rules.
He said that they need to consolidate information from different sources.
Luckin Coffee was forced to delist from overseas markets due to fraud.
The China Hustle, an American documentary, estimated that pension funds and retirement funds lost at least 14 billion dollars to Chinese stocks that turned out to be frauds. Increased connections between Chinese financial markets and the global system were called for in the film.
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