Written by Ken Wu, Julie Zhu, Selina Li, and Scott Murdoch
HONG KONG (Reuters) – More than a year after China pledged to make overseas listings easier, companies are grappling with a regulatory impasse that is unlikely to ease soon, and eyeing the prospect of sharply lower valuations even as market sentiment improves.
Hopes for a rebound in offshore listings were sparked by Beijing's pledge in April to facilitate initial public offerings in Hong Kong and Zicker's strong debut in New York last month. China has been clamping down on capital raisings abroad since 2021.
A 6.1% year-to-date jump as of Friday, after falling as much as 18% last year, is also expected to provide opportunity for IPO participants.
But bankers, Chinese corporate executives and their investors said they expect the drought in overseas IPOs to continue this year, affecting companies' ability to raise capital as the economy slows.
Overseas listings are important fundraising channels for Chinese companies. These deals also represent the bulk of revenue generated by global investment banks in Asia.
The lack of such deals, a result of China's regulatory crackdown, as well as volatile capital markets and geopolitical tensions over the past two years, has led to layoffs at banks and weighed on the returns of private equity funds.
According to Reuters calculations, IPO proposals for Chinese companies in Hong Kong worth at least $20 billion have been awaiting approval for months. Bankers close to those deals say most of the big deals are unlikely to hit the market soon.
Reuters reported on Wednesday that home appliance company Midea was inquired about how a planned $2 billion Hong Kong listing would affect the value of its Shenzhen-listed shares.
Although monthly approvals, on average, rose to nearly 13 IPOs in the first five months of this year, up from 9 during the nine months of last year after the introduction of the new rules, none are expected to raise more than 500 million dollars.
The China Securities Regulatory Commission (CSRC), which unveiled rules to strengthen oversight of overseas listings last March, has approved only one initial public offering through May 24. The regulator's website showed on Friday that it had approved seven more applications.
In response to a Reuters request for comment sent last Thursday, the SEC said it has always supported domestic companies to legally tap into onshore and offshore markets for financing and development purposes.
However, a Hong Kong-based banker, who declined to be named due to the sensitivity of the matter, said it sometimes takes months from an IPO application to regulatory approval.
Listing consultants said the bottlenecks were mainly due to inter-departmental scrutiny.
Chinese companies with a so-called variable interest entity (VIE) structure, which is common among companies with foreign investors, will have to obtain approval from their primary industry regulators under the new registration system.
But consultants said the TRA had no authority over other government and Communist Party bodies, such as the Cyberspace Authority, leading to delays and uncertainty for companies.
Since the introduction of offshore listing rules, the SEC has “actively and orderly” processed IPO applications, and the number of companies completing the application has increased every month, the regulator said.
Approval process
CSRC approval, which is referred to as the completion of IPO applications, is the regulatory green light a company needs before launching its IPO — a process that ended years of a hands-off approach to raising money from abroad.
A senior banker at a foreign bank said the approval process had on average delayed an offshore offering by two to three months, with the time needed for all regulatory approvals reaching at least eight to nine months.
Chinese companies raised $1.5 billion from overseas IPOs as of May 17, down 21% year-on-year, well below the record $27 billion set in 2021, LSEG data showed.
The Securities and Exchange Regulatory Commission said it would continue to “improve the supervision mechanism for overseas listing applications” and that “in the near future, more companies will successfully complete the application process.”
The lengthy regulatory process comes on top of China's slowdown and real estate crisis, which has left exporters and investors concerned about stock offerings and company valuations.
JD (NASDAQ:) Industrials, a VIE-structured company whose Hong Kong listing application was filed more than a year ago, is still awaiting approval pending supplementary materials, a regulatory filing shows.
Its parent JD.COM has withdrawn the spin-off listing of another unit – JD Property, after the last Hong Kong stock exchange filing lapsed, two sources familiar with the matter said.
They said JD Property had not received CSRC approval, although it was not clear whether regulatory hurdles were the reason for the withdrawal.
JD.com, the parent company of JD Industrial and JD Property, did not respond to a Reuters request for comment.
Some IPO hopefuls are concerned they may be forced to list at lower valuations if demand declines by the time approval is granted, a banker and a senior executive at one of the potential listing candidates said.
They added that others accepted the slow pace of approvals and did not seek to pressure regulators.
“In the past, it was often the case that regulators quietly supported companies seeking to list overseas,” said Christopher Beador, deputy director of China research at Gavical Dragonomics. “Now the political incentives have completely changed.”
“There is a lot of downside risk to support a foreign listing, and not a lot of upside.”