China is rejigging the pathway for mainland companies seeking to go public, with tighter access to foreign markets and more options in its own home market. finews.asia reviews the recent developments. 

Chinese companies seeking funding through public listings are facing increasing pressures including scrutiny against variable interest entities (VIE), data and national security concerns and more. 

This is on top of ongoing U.S.-China political tensions with some moves first laid out by the former Donald Trump administration still having a lasting effect on Chinese financial markets. 

finews.asia reviews the latest developments for prospective mainland Chinese listings. 

U.S. Delisting Pressures

According to the Securities and Exchange Commission chair Gary Gensler, «the clock is ticking» for Chinese companies to permit inspection of their financial audits or risk being delisted from the New York Stock Exchange and Nasdaq as soon as 2024.

One area of particular concern is VIEs – a structure commonly used by Chinese firms to receive foreign capital in places like the U.S. or Hong Kong – and Gensler told staff last month to take a pause on the IPOs of such firms. 

«Please describe how this type of corporate structure may affect investors and the value of their investment, including how and why the contractual arrangements may be less effective than direct ownership, and that the company may incur substantial costs to enforce the terms of the arrangements,» said a letter from the SEC on new risk disclosure rules. 

Offshore Listing Pressures

China is also increasing scrutiny against VIEs and has put its own freeze on such structures seeking offshore investments.

Shanghai’s National Development and Reform Commission (NDRC) is turning away applications seeking approval to inject money into affiliated entities incorporated in places like the Cayman Islands, according to a «Bloomberg» report citing unnamed sources, with companies being told that outbound investments into VIE structures are being halted as per a directive from Beijing.

And this is in addition to existing pressures against offshore listings over data and national security concerns from tech companies such as ride-hailing giant Didi.

Third Exchange

While offshore options face pressure, domestic options in China are increasing with President Xi Jinping recently announcing the establishment of a new exchange in Beijing.

Officially known as the National Equities Exchange and Quotations, it will target small and medium-sized businesses and will become the third exchange in mainland China alongside Shanghai and Shenzhen. 

PE, Bonds

Pressures on funding sources are not only limited to foreign channels with other domestic options like private and bond markets also facing challenges.

The China Securities Regulatory Commission (CSRC) recently said it would crack down on private equity and venture capital funds including those that are sold to the general public instead of targeted investors.  

And in bond markets, credit spreads are increasing, especially for high yield issuers, due to Beijing’s deleveraging efforts as well as the ongoing Evergrande debt debacle.