According to The Wall Street Journal, the China Securities Regulatory Commission (CSRC) plans to propose a number of rules that would ban local major tech companies from going public overseas, particularly in the United States. This applies primarily to firms that work with large amounts of sensitive consumer data.
The new regulations are aimed at protecting the personal data of Chinese citizens. They target companies seeking foreign initial public offerings via their divisions incorporated outside the country, including such tech giants as Alibaba Group Holding Ltd, Didi Global Inc ADR, and Tencent Holdings Ltd. These corporations bypass restrictions through the so-called variable interest entity (VIE). This structure is used to raise capital from foreign investors and list offshore.
Over the past two years, the VIE structure has been pretty popular among many Chinese companies. It helped them receive access to foreign capital by registering offshore and going public on exchanges in the United States and Hong Kong. With the help of VIEs, international investors can also take stakes in offshore units of China's firms. Currently, private Chinese companies under the VIE structure do not need to seek approval from the CSRC for US listings. However, under the new rules, the country’s regulatory bodies are going to establish a mechanism requiring companies to obtain formal approval for overseas IPOs. Thus, the CSRC intends to implement them in the fourth quarter of 2021 and therefore have asked a number of companies to hold off listing abroad.
This would help Beijing exercise more control over the whole corporate structure, Internet services, as well as telecommunications and education enterprises. According to Chinese officials, it is necessary for national security purposes. The plan to step up supervision of local companies listed overseas came after the country’s dominant taxi-hailing firm Didi made its Wall Street debut despite the Chinese regulator’s recommendations.
Notably, in order to obtain public company status, large tech corporations are required to get official permission from an inter-ministerial committee. It includes CSRC members, the Cyberspace Administration of China, and some ministries. This department is planned to be created in the coming months.
The Cyberspace Administration of China stressed that any company with data for more than 1 million users must undergo a security review before listing its shares overseas. Likewise, the major cause that had prompted the country's Internet watchdog to impose tighter restrictions was the Didi incident. The position of CSRC officials is not in line with that of the US Securities and Exchange Commission. The latter has increased control over Chinese companies conducting IPOs in the United States.
Amid growing tensions between Washington and Beijing, many Chinese companies such as tech giant Baidu Inc appear to be returning home. In late August, the leading search engine operator launched its Hong Kong secondary listing, analysts said.
