China’s securities regulators are rolling out the red carpet for technology and strategically important companies to raise capital onshore, expanding the scope of a 2018 pilot scheme for so-called red chips to list in either Shanghai or Shenzhen.
Red chips – companies whose businesses are based in mainland China but are incorporated offshore – in seven new eligible sectors will be allowed to issue either shares or Chinese depositary receipts in the two Chinese exchanges, according to a Friday statement by the China Securities Regulatory Commission (CSRC). The new sectors are information technology, new energy, new energy vehicles (NEVs), new materials, environmental protection-related businesses, aerospace and marine equipment, adding to seven existing sectors first announced in 2018.
The widening of the pilot scheme marks a vital step in the Chinese government’s plan for local institutions, asset management funds and individual investors to reap the capital gains from China’s growth champions, particularly technological start-ups that had been the paragons of wealth creation.
“Regulators are identifying different fundraising avenues for the tech sector,” said China Renaissance’s head of macro and strategy research Bruce Pang. “While they want to supervise the approval procedures of offshore listings in a more manageable way, they also acknowledge that there is a genuine funding demand for Chinese tech companies.”
Source: Refinitiv. SCMP Graphics
Global stock exchanges from New York to Hong Kong have been competing to help red chips raise capital, a race that Hong Kong has won in seven of the past 12 years. Now, Chinese authorities are ready to overhaul their listing rules for more tech companies to raise funds in the onshore “home market,” analysts said.
The first red chips were Chinese state-owned companies that were registered in Hong Kong, like China Mobile, Cnooc Limited and Citic Limited, which are subject to the city’s laws and regulations. As of August 31, the Hong Kong stock exchange listed 171 red chips valued at a combined HK$4.98 trillion (US$639.7 billion), of which Shenzhen International Holdings was the first, listed in September 1972.
Hundreds of would-be investors queued up for the stock listing prospectus by the red chip China Telecom on October 13, 1997. Photo: Reuters
Over the years, a different class of stock called H shares emerged, representing China-incorporated companies listed in Hong Kong, such as China Construction Bank and Ping An Insurance. These new economy companies accounted for 17.8 per cent of China’s 2020 gross domestic product, data from the country’s statistics bureau shows.
Since the fallout from Didi Chuxing’s US IPO, as the ride-hailing operator pressed ahead with its blockbuster US$4.4 billion New York listing in June despite regulators’ call for its delay, Chinese regulators have sped up their work to revamp the country’s regulatory framework governing offshore listing. These include mandating companies with more than one million users’ data to go through cybersecurity review before seeking an offshore listing.
The uncertainty on how the future regulatory landscape would look has already dried up listings by Chinese companies in the US, which has grounded Chinese issuers’ US IPOs to zero since July, according to data from Refinitiv.
The listing eligibility criteria have also been lowered since the 2018 pilot. The valuation to qualify a listed red chip to raise funds onshore was slashed to 20 billion yuan, from 200 billion yuan (US$31 billion).
The latest CSRC notice also followed the approval of Megvii, an artificial intelligence company with a variable interest entity (VIE) structure, to list on Shanghai’s Star board earlier this month. Megvii scrapped its plan for a US$500 million IPO in Hong Kong last year, after it had become one of the 28 Chinese companies put on a US sanctions list that restricts the sale of American technology and products.
Analysts said Megvii’s approval is a sign that the Chinese regulators could give the go ahead to more VIE-structured companies to list on domestic exchanges given more stringent disclosure requirements in the US on these firms. Such a popular structure, used by many Chinese offshore issues, has often been described as shell companies. VIE-backed companies are also a type of red chip companies, according to mainland law firm Zhong Lun.Internet Explorer Channel Network