SOURCE / ECONOMY
China unveils draft rules for domestic firms’ overseas IPOs, bans listings endangering national security
Published: Dec 25, 2021 01:17 AM
stock market Photo:VCG

Photo:VCG


China's securities regulator on Friday unveiled draft rules to regulate domestic firms' overseas listings, which would ban listings endangering national security and mandate security review filings by IPO hopefuls that fall under the purview of foreign investment security and cybersecurity reviews, as the country takes a key step to closing its securities regulatory loopholes in the face of financial decoupling from the US.

The securities regulator also defused woes over banning overseas listings through variable interest varieties, a structure prevalently used by technologies firms seeking overseas capital, so long as such listings meet compliance requirements.

The draft rule also represented an upgraded Chinese regulatory framework in the midst of rising geopolitical tensions and technological advances, based on the overseas listing rule drawn up in 1994, analysts said.

Under the regulation, which is drafted by the Chinese Securities Regulatory Commission (CSRC) and relevant departments of the State Council, China's cabinet, domestic firms seeking to list abroad must carry out relevant security screening procedures if their businesses involve such supervision. 

Relevant departments of the State Council are also entitled to ask them to spin off domestic business or assets, or take other effective measures to either erase or prevent the impact of overseas listings on national security.

The regulation has five chapters, aiming to further advance the supervision over the direct and indirect overseas listing activities of domestic enterprises with unified filing management. It also highlighted regulatory coordination mechanisms and clarified legal responsibilities, among other contents. 

In terms of rising concerns over China's ban on VIE structures following Didi's delisting from the New York Stock Exchange in early December, CSRC said that Chinese companies with VIE structures that meet compliance requirements could list abroad after going on the record, on the premise that they abide by Chinese regulations and laws. 

CSRC stressed that improving the supervision framework does not represent a tightening of policies involving overseas listing, and it is a necessary step in facilitating China's systematic high-level opening-up. 

"Looking to the future, China's direction of opening-up will not change, neither will its attitude of supporting companies using the two resources," CSRC said, adding that its attitude of respecting companies' ability to voluntarily choose their listing markets is clear, coherent and has never been shaken. 

The new draft rules for overseas flotation typify China's move to take advantage of both the domestic and overseas markets, Wu Jinduo, head of fixed income at the research institute of Great Wall Securities, told the Global Times on Friday, citing the most keenly watched part of the new rules, which include unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation.

The draft is a clear indication that China's confidence in the opening-up of its capital market remains as firm as ever, while encouraging qualified and compliant companies to list overseas, Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, told the Global Times on Friday. The quality of overseas listing will be further improved, and in particular, administrative licenses for overseas listing in the past are now changed to record management, which is a reflection of a more inclusive and open performance in the Chinese supervision system, Dong said.

According to the CSRC, China will also actively promote cross-border auditing supervision cooperation, establish information-sharing mechanisms with foreign securities regulators, and strengthen cross-border legal execution to jointly crack down on illegal activities involving financial fraud. 

Firms that risk endangering national security are among those off-limits for overseas listings.

In light of some discrepancies between Chinese and US regulators, such as a yet-to-be reached consensus on the opening of audit working papers, it's more likely that the CSRC and its overseas counterparts will seek common ground while putting aside differences, Wu stated.

The new rules also raise the cost of violations in the wake of Didi's delisting and the accounting scandal involving Luckin Coffee, she continued, noting that local firms' overseas listings are also part of the yuan's globalization and the capital market's opening-up.

The draft rules were also part of the efforts to make the Chinese equity market a truly globalized fundraising destination.

Also on Friday, both the Shanghai Stock Exchange and the Shenzhen Stock Exchange released interim regulations for listing and trading of depository receipts under a linkup between the two bourses and overseas stock exchanges, seeking public comments through January 16.

The interim regulations are seen as reviving hopes for an international board where foreign firms can raise capital from the A-share market.