By Kane Wu, Julie Zhu, Selena Li and Scott Murdoch
HONG KONG (Reuters) – More than a year after China promised to smooth the offshore listing process, companies are reeling from a regulatory impasse that is unlikely to be resolved soon, and facing the prospects of sharply lower valuations, even with the improvement in market sentiment.
Hopes of a revival in overseas listings were raised by Beijing’s promise in April to facilitate Hong Kong IPOs and Zeekr’s strong debut in New York last month. China has cracked down on offshore capital raising since 2021.
A 6.1% year-to-date jump in the Hang Seng index on Friday, after falling as much as 18% last year, was also expected to offer a window of opportunity for IPO participants.
But bankers, Chinese company executives and their investors said they expect the offshore IPO drought to continue this year, weighing on companies’ ability to raise capital in a slowing economy.
Offshore listings are essential fundraising channels for Chinese companies. These deals also represent a large part of the revenues that global investment banks earn in Asia.
The lack of such agreements, as a result of China’s regulatory crackdown as well as capital markets volatility and geopolitical tensions over the past two years, has resulted in bank layoffs and weighed on private equity fund returns.
At least $20 billion in IPO proposals from Chinese companies in Hong Kong have been awaiting approval for months, according to Reuters calculations. Bankers close to these businesses say most of the sizable deals are unlikely to come to market soon.
Home appliance maker Midea was asked how a planned more than $2 billion listing in Hong Kong could affect the value of its Shenzhen-listed shares, Reuters reported on Wednesday.
Although monthly approval on average increased to around 13 IPOs in the first five months of this year, up from 9 in nine months last year, following the introduction of the new rules, none of them are expected to raise more than 500 million of dollars.
The China Securities Regulatory Commission (CSRC), which unveiled rules to increase oversight of offshore listings last March, has approved just one IPO by May 24. The regulator’s website showed on Friday that it had approved seven more requests.
In response to Reuters’ request for comment sent last Thursday, the CSRC said it has always supported domestic companies to legally explore onshore and offshore markets for financing and development purposes.
A Hong Kong-based banker, who declined to be named due to the sensitivity of the matter, said, however, that it sometimes takes months from IPO filing to regulatory approval.
The bottlenecks are mainly caused by interdepartmental scrutiny, listing consultants said.
Chinese companies with the so-called variable interest entity (VIE) structure, common for companies with foreign investors, must obtain approval from their respective primary industry regulators under the new filing regime.
But the CSRC does not have authority over other government and communist party bodies, such as the cyberspace authority, which has led to delays and uncertainty for companies, the advisers said.
Since the implementation of offshore listing rules, the CSRC has “actively and orderly” processed IPO applications, and the number of companies completing the application has been increasing every month, the regulator said.
APPROVAL PROCESS
CSRC approval, known as completion of IPO filings, is the regulatory clearance a company needs before launching an IPO – a process that ended years of a laissez-faire approach to overseas fundraising.
The approval process on average delayed an offshore offering by two to three months, with the time required for all regulatory clearances totaling at least eight to nine months, said a senior banker at a foreign bank.
Chinese companies raised $1.5 billion in offshore IPOs through May 17, down 21% on the year, LSEG data showed, far below the record $27 billion set in 2021.
The CSRC said it would continue to “optimize the supervision mechanism for overseas listing applications” and that “in the near future, more companies will complete the application successfully.”
The long regulatory process comes on top of China’s slowdown and the crisis in the real estate sector, which have caused both issuers and investors to worry about share offerings and company valuations.
JD Industrials, a VIE-structured company whose application for listing in Hong Kong was filed more than a year ago, is still awaiting approval pending supplementary materials, a regulatory disclosure shows.
Its parent JD.COM has delisted another unit – JD Property, after the last listing on the Hong Kong stock exchange expired, two sources with knowledge of the matter said.
JD Property did not obtain authorization from the CSRC, they said, although it was unclear whether regulatory hurdles were the reason for the withdrawal.
JD.com, parent company of JD Industrial and JD Property, did not respond to Reuters’ request for comment.
Some IPO candidates fear they may have to list at lower valuations if demand wanes once approval is granted, said a banker and a senior executive at a potential listing candidate.
Others accepted the slow pace of approvals and did not seek to pressure regulators, they added.
“In the past, it was often the case that regulators quietly defended companies looking to list abroad. Now the political incentives have completely changed,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.
“There is a lot of downside risk in supporting a foreign listing, and not much upside.”
(Reporting by Kane Wu, Julie Zhu and Selena Li in Hong Kong and Scott Murdoch in Sydney; Additional reporting by Sophie Yu and Jenny Yu in Beijing; Editing by Sumeet Chatterjee and Jacqueline Wong)
