China prepares a reform to be able to block IPOs outside the country

1. Víctor Blanco Moro
2. Jose Luis de Haro

The economic and cultural battle between China and The United States is now fighting on the stock market. One of the most important raw materials in the new digital world, if not the most, is data, and the two giants are currently fighting to maintain the greatest possible control of the information that circulates on the network.

In this fight, the IPOs of Chinese companies in the US market have become a thorn in the side for China, which has been trying for some time to convince the country's giants to go public in the local market, and thus prevent the US regulator from having access to sensitive information from these companies.

Now it seems that the Chinese government has decided to directly block the possibility of its domestic companies going public in other markets and, according to reports from Bloomberg, the regulator is already preparing a reform to be able to act in this sense. It would mean changing a regulation that has been in force since 1994 and that has allowed a large group of Chinese companies to list their shares in the United States, something that from now on the Chinese regulator would not allow.

Didi Global is punished

For now, the insistence on the part of Beijing is not being enough to achieve its objective, since the firms have not stopped approaching New York and other large stock markets in the country to place their shares on the public market.

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— Brian Ambrozy Wed Nov 05 19:58:46 +0000 2008

Since the start of 2021, a total of 34 Chinese companies have launched IPOs in the US, raising as much as $12.4 billion, according to Dealogic. If we go back a decade, the number exceeds 76,000 million dollars, according to calculations by Bloomberg.

What happened in recent days with the Chinese firm Didi Global seems to show that the Chinese government has decided to act the hard way, if necessary, to stop the IPOs of its technology giants in foreign markets: after failing to In its attempt to convince the transport services company not to list its shares in New York, the Chinese cyberspace regulator has banned the commercialization of Didi's app in the country, causing a stock market collapse in the firm, which until new order will not be able to carry out its business normally.

Before Didi, the regulator already canceled the IPO of Ant Group, Alibaba's financial arm, last November, after Jack Ma, the firm's founder, made comments against certain regulatory measures in the country .

Analysts expect China to continue clamping down on hometown companies whose size and international influence it views as a threat to its national security. Indeed, Reuters, citing three people familiar with the matter, said Chinese regulators could now block a merger between two game streaming sites: DouYu International Holdings (owned by Tencent) and Huya.

Damage for investors

The conflict is taking its toll on the price of Chinese companies listed in the US. "US investors will have to weigh the risks of owning ADRs at a time when tensions between Beijing and Washington remain high, while all global investors will have to weigh the allure of China's vast market against the possibility that their officials can reshape the prospects of these companies at the stroke of a pen by imposing regulatory restrictions," explains Roukaya Ibrahim, vice president of BCA Research.

Roukaya dwells on how the Invesco Golden Dragon China ETF, the tracker of the most prominent Chinese 98 ADRs, has lost a third of its value since the February high. For its part, the S&P/BNY Mellon China Select ADR Index, which also tracks Chinese ADRs listed in the US, has erased almost 15% of its value so far this year.

TS Lombard's Rory Green describes the Beijing restrictions as a battle for data sovereignty. "Data control is becoming a major national and geopolitical issue , with direct stock market implications for companies operating on both sides of the Pacific," he says in a analysis for your clients.

We must also not forget that US legislators passed a law last year that requires Chinese companies listed in the US to submit to audits within three years under the same conditions as any other American company. If they do not do so, they could be expelled from the stock exchanges in which they operate.