Chinese IPOs In US Boom, But Regulatory Frictions Loom - Editorial Comment

Tom Burroughes

3 August 2021

Being a news editor gives me plenty of chances to spot unintended ironies. An example came yesterday when I received an email stating “Chinese companies raised a record $12.5 billion in 34 IPOs in US capital markets, more than in the entire 2020.”

The email containing these figures, produced by BuyShares.co.uk, was highly positive about the market, and its prospects. It continued: “The US capital markets have been a lucrative source of funding for Chinese companies in recent years, especially for tech firms looking to benchmark their valuations against listed peers. Many of them kept their enthusiasm for US markets in 2020, despite turbulent relations between the world's two largest economies.”

And: “The Renaissance Capital data showed that last year, China-based companies raised $11.7 billion through a total of 30 initial public offerings in the United States, the highest amount of capital since 2014 when Alibaba went public as the biggest IPO to date.”

As the email suggested in reference to “turbulent relations” between the US and China, there are a lot of flies in the ointment. As reported late last week (Reuters, others), the US will not allow Chinese companies to raise money in the US unless they fully explain their legal structures and disclose the risk of Beijing interfering in their businesses. This statement follows talks (see reports here) reportedly held between US banks and Chinese regulators about Beijing’s regulatory moves against several sectors, including Western firms providing education services to China. The actions prompted a slump in stocks of various firms, hitting portfolios of investors.

Refinitiv figures show that Chinese listings in the US have reached a record $12.8 billion so far this year. But as Reuters reported (30 July), deal flows slowed substantially in July after Chinese regulators banned ride-sharing firm Didi Global from signing up new users just days after its IPO. SEC Commissioner Allison Lee has reportedly said that Chinese companies listed on US stock exchanges must disclose to investors the risks of the Chinese government interfering in their businesses as part of their regular reporting obligations.

Beijing’s actions are a reminder that the world’s second-largest economy is still in some key respects an emerging, rather than fully developed, market. And, as I recall over the years, one of the issues emerging market investors have to remember is not just return on their investments but return of their investments.

Regulators who suddenly impose rules, however rational or defensible, should do so clearly and telegraph their intentions. It may be that an authoritarian state such as China thinks it can act as it does, given the weak state of the global economy and demands for Chinese capital. But Chinese policymakers are not, surely, oblivious of the risks. China has, after all, been opening its capital markets in recent years to foreigners. If it wishes that happy state to continue, its rules must be clear, consistent and introduced in a measured way. Rival financial centres, such as London’s City, rose to greatness precisely because of such qualities.

The next time I come across enthusiastic press releases about initial public offerings, I’ll bear such considerations in mind.