Chinese firms with offshore structure to need approval for Hong Kong IPOs

REUTERS/Bobby Yip

China’s securities regulator is looking to expand its scrutiny of overseas listings by offshore incorporated companies to include initial public offerings (IPO) in Hong Kong, five people with knowledge of the matter said.

The China Securities Regulatory Commission (CSRC) has already been setting up a team to focus on companies seeking to list offshore using the so-called variable interest entity (VIE) corporate structure which Beijing says has led to abuse.

But some market participants had not expected the scrutiny to be extended to such firms seeking to list in the Chinese territory of Hong Kong – a preferred venue for companies in the world’s second-largest economy to raise capital offshore.

However, under the new rules being drafted, CSRC will not exclude Hong Kong-bound Chinese companies with a VIE structure from seeking approval, the people told Reuters on condition of anonymity given the sensitivity of the change.

The move would not augur well for the Asian financial hub as it may make it more challenging for Chinese firms looking for a venue closer to home amid tighter checks in the United States – another top destination for offshore floats.

The proposed changes are part of China’s months-long crackdown on private firms to rein in “disorderly expansion of capital” that has involved behemoths like Alibaba, Ant Group and ride-hailing giant Didi.

There is no timeline for the unveiling of the new guidelines, the sources added.

CSRC did not respond to a request for comment, while Hong Kong Exchanges and Clearing Ltd (HKEX), the operator of the local bourse, and the markets regulator Securities and Futures Commission declined to comment.

VIE STRUCTURE

The VIE structure was created two decades ago to circumvent rules restricting foreign investment in sensitive industries such as media and telecommunications, enabling Chinese companies to raise funds overseas via offshore listings.

It has been widely adopted by China’s new economy companies, mainly internet firms, that are generally incorporated in the Cayman Islands and the British Virgin Islands and therefore falls outside Beijing’s legal jurisdiction.

Under the existing rules, Chinese companies with a VIE structure do not have to seek formal regulatory approvals for IPOs in the United States or in Hong Kong and can bypass the scrutiny and lengthy IPO vetting process that locally incorporated companies have to go through.

There have been $35.3 billion worth of IPOs in Hong Kong in 2021, of which Chinese companies accounted for 96.3%, according to Refinitiv data. The value of deals is up from $22.76 billion from a year earlier, the data showed.

Separately, HKEX has also increased scrutiny of Chinese IPO candidates that now face more queries on potential regulatory issues, said two of the sources, who advise some of those companies.

Reuters

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.