New Beijing Signals Reinforce China's Intent to Reopen U.S. IPO Pipeline

Key Takeaways:

• China Securities Regulatory Commission Chairman Yi Huiman says his agency is aiming to quickly implement new rules government overseas listings by Chinese firms
• New U.S. IPO application by cold rolled steel maker Hongli continues nascent resumption of Chinese listings in New York

By Doug Young

It’s been about four weeks since China sent a clear signal that it intended to let its companies keep making overseas IPOs, following its publication of new rules for such listings with stronger government oversight. Since then top officials from the country’s securities regulator have followed with a steady series of signals to reinforce that message, including a high-profile interview on the country’s flagship English-language TV station.

The latest signal came this week from the very top of the China Securities Regulatory Commission (CSRC) in new comments from Chairman Yihuiman. We’ll summarize those comments shortly, as well as lengthier ones from CSRC Vice Chairman Fang Xinghai in an interview on China Global Television Network (CGTN) shortly after the New Year.

The overall message is clear, namely that China will continue allowing its companies to make overseas listings. One of their favorite listing grounds in the U.S. suddenly became problematic last year after both the CSRC and U.S. securities regulators expressed different concerns about the practice.

China’s main concerns involved national security related to listed companies that possessed large volumes of sensitive data. The U.S. was mostly focused on its lack of access to Chinese companies’ accounting records, as well as lack of transparency due to their frequent use of a controversial corporate structure called variable interest entity (VIE).

In the meantime, a trickle of trans-Pacific listing applications has already resumed, all outside the most-sensitive realm of high-tech companies that often possess the biggest volumes of sensitive data. The latest such application floated up at the very end of last year when cold rolled steel products maker Hongli Group Inc. (HLP.US) made its first public filing for a listing to raise a modest $30 million.

We’ll return to Hongli and the handful of other Chinese companies that have filed for U.S. listings in recent months, becoming the first since such applications ground to a sudden halt shortly after the IPO by the Uber-like DiDi Global DIDI last July.

But first, we’ll look at the latest signals from the CSRC, which provide the clearest indication yet that the China-to-U.S. IPO train could start to pick up some momentum after the Lunar New Year that falls on Feb. 1 this year.

The remarks from CSRC Chairman Yi Huiman came in comments published Monday in a work report summarizing the agency’s accomplishments last year and where its priorities will lie in 2022. The report contained typical boilerplate language for this kind of official document, and in this case said the regulator was aiming for “speedy implementation of policies governing overseas share sales by domestic companies,” according to a report in financial publication Caixin.

The remarks from CSRC Vice Chairman Fang Xinghai were a bit more dynamic and detailed, coming in a half-hour interview on English broadcaster CGTN. Among other things, Fang said the new rules issued just before Christmas were designed to “improve oversight and better protect investors,” according to CGTN’s own write-up of the interview.

Information sharing

Fang also revealed that that the CSRC has been talking with its U.S. counterpart, the Securities and Exchange Commission (SEC), about an information-sharing deal that would give U.S. regulators access to accounting records for New York-listed Chinese companies when such companies are suspected of irregularities. Such talks have been rumored before, but Fang’s remarks were one of the clearest indications yet that they are actually happening.

Such an agreement is a key component of U.S. concerns, since lack of access to accounting working papers was one of the major complaints by the SEC. If the two sides fail to reach such an agreement, a law passed last year could give the SEC authority to start delisting Chinese companies from U.S. stock exchanges starting in January 2024.

“This new regulation will give companies a formal process to follow and give overseas regulators confidence in Chinese companies, Fang explained, adding that if there are any problems, the SEC and CSRC will have an understanding before the listing so regulation will be much easier,” CGTN said in its writeup of the interview.

All that said, we’ll wind down this review with a look at the status of four IPO applications that have moved ahead in the months since the DiDi dust-up.

Of the four, the only one to actually start trading so far was biotech firm LianBio LIAN, which raised a sizable $325 million in its November listing. The shares have performed miserably since then, losing about two-thirds of their value to fall from an IPO price of $16 to their latest close of $4.94. Another similar-sized listing by hotel operator Atour has gone silent since its most recent filing in November. A smaller application by medical device maker Meihua International to raise a modest $70 million made its most recent filing just three weeks ago.

Those three all look relatively benign in terms of possessing sensitive data that might concern Chinese regulators. The same looks true for Hongli, whose customers include major names like Caterpillar CAT, Hitachi (6501.T), Hyundai (005380.KS) and Volvo.

Such a roster of big-name clients, combined with its position in a relatively mature industry, is also probably welcome by the SEC, as there’s less room for manipulation of financial data. In terms of actual financials, Hongli’s revenue grew 20% from 2019 to $11.2 million in 2020, while its profit grew by 14% to $2.4 million over the same period. Again, both figures don’t look exceptional but are reasonable and thus probably welcome by the SEC.

We’ll close by noting the risk-related language in Hongli’s prospectus, which quite directly states: “Investing in our ordinary shares involves a high degree of risk, including the risk of losing your entire investment.” By comparison, Atour’s and Meihua’s prospectuses use the simpler language saying simply that investing in their shares “involves a high degree of risk.”

The bigger takeaway is that risk-related language in the disclosure materials for this group is becoming more voluminous and explicit, as the SEC seeks to alert investors of the relatively speculative nature of such shares.