China talks up support for IPOs. Investors are watching the speed of approval

A man walks a dog in the shade away from the midday sun past the New York Stock Exchange (NYSE) building in Manhattan, during hot weather in New York City, New York, U.S., August 11, 2020.Mike Segar | Reuters

BEIJING — Chinese authorities this week announced new policy for supporting venture capital, raising hopes for faster approvals of initial public offerings in the near future.

A once-burgeoning ecosystem of investment capital and startups in China has slowed drastically in the last three years amid increased regulatory scrutiny.

In one of the latest efforts to shore up the industry, China's top executive body, the State Council, late on Wednesday published high-level measures for "promoting the high-quality development of venture capital."

"Everything is going to depend on the implementing regulations," said Marcia Ellis, global co-chair of private equity practice at Morrison Foerster.

"It's positive the government at the central level has realized there is a problem," Ellis said. "At least with respect to investments in technology, venture capital can be a positive force in the market in China that frankly can help China compete with the U.S. in the tech race."

In terms of actions to watch, Ellis said that "really what we're looking for as far as IPOs, is if the approvals start coming out at a quicker pace."

"Venture capital investors are not going to make investments unless they can see a reasonably clear path to an exit," she said, noting that has not been case for the past year or so.

The new policy included a section on expanding exit channels for venture capital, with an emphasis on supporting companies with technological breakthroughs. The measures also called for implementing a management system for overseas listings and smoothing the exit channels for venture capital funds not denominated in yuan.

"The real bottleneck for overseas listings is the overseas IPO process and foreign exchange rules," said Winston Ma, adjunct professor at NYU School of Law.

The pace of both onshore and overseas public offerings has slowed. Investors, especially those who put U.S. dollars into China-based venture capital funds, have preferred IPOs in the U.S. as the largest and most liquid market.

Looking ahead, "the market is watching the speed of U.S. IPO approvals," Ming Liao, founding partner of Prospect Avenue Capital, said in Chinese translated by CNBC.

Challenges for overseas IPOs

Chinese authorities tightened their scrutiny and introduced new rules for overseas IPOs after ride-hailing company Didi went ahead with a U.S. listing in 2021 despite reportedly being under government investigation. Separately, the U.S. has increased its scrutiny of U.S. capital going into China, especially military-related entities.

Previously, lack of regulation also resulted in a number of high-profile cases of fraud involving China-based IPOs in the U.S.

Morrison Foerster's Ellis cautioned how the new policy encouraged businesses and research institutions broadly to participate in venture capital.

"Unfortunately I think if companies that are not professional investors start doing this and are doing this because they are encouraged by the government, it may just be more damaging to the market in the long run because they're going to lose money and it's going to stain the venture capital market in China," Ellis said. "You need professionals doing this."

The China Securities Regulatory Commission has increased fines for misleading investors and clarified requirements for overseas IPOs. Last year it announced updated rules, effective March 31, 2023, that said domestic companies need to comply with national security measures and the personal data protection law before going public overseas.

Since then, 73 companies have listed in the U.S. and 85 in Hong Kong, Fang Xinghai, vice chair of the commission, said during a conference Wednesday, according to state media.

The IPO processing speed hasn't been fast enough and will be accelerated, Fang said in the report, adding the commission supports mainland Chinese companies to list overseas, especially in Hong Kong.

Fast-fashion giant Shein, which has tried to distance itself from its Chinese roots, has reportedly shifted its plans for a U.S. listing to one in London amid regulatory scrutiny.

VCs in China for China

China has also sought to develop its domestic stock markets, which are only about 30 years old.

Morgan Stanley equity analysts noted separate comments Wednesday from Wu Qing, head of China's securities regulator, that capital markets should increase their targeted support for businesses in line with the country's efforts to develop new technologies.

"We think it implies capital markets could welcome more diverse IPO candidates as long as they can demonstrate innovation and drive productivity growth, although IPO volume might remain low near term given higher standards are also in place," the Morgan Stanley report said.

Wu took over as CSRC head in February after a volatile downturn in mainland stocks. Markets have since recouped losses for the year so far.

The new policy also called for supporting international investment institutions to establish yuan-denominated funds.

"If foreign funds were able to set up RMB funds more easily, then there is money that wants to do that," Ellis said.

"There are a lot of China-focused funds that are headquartered in Asia," she said. "They are USD funds but their management companies also want to manage onshore RMB funds because they feel like they can actually raise money in China for China investments, whereas raising USD from the U.S. and potentially Europe for China-focused funds is now very difficult."