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Chinese start-ups caught in US listings limbo

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Some of China’s most valuable start-ups are scrambling to find a way out of listings purgatory in the US as their top advisers on Wall Street admit they have been stymied by new demands from regulators in Beijing and Washington.

More than 50 Chinese companies that filed their intention to list on US markets this year are “in limbo”, several of their advisers said. Initial public offerings by Chinese groups in the US have ground to a halt after the $4.4bn listing of ride-hailing app Didi Chuxing in June, which was followed by a flurry of regulatory moves in China and the US.

Bankers have been forced to freeze deals that were near completion as they weigh up how to comply with new requirements from US financial regulators to explain how they will be affected by new Chinese rules that do not yet exist in their final form.

The proposed regulations would require nearly all companies that list in foreign countries to submit to a cyber security review that would dramatically heighten Beijing’s oversight.

In the first half of the year, 34 Chinese companies raised $12.4bn in New York IPOs, a record high on both counts. About 20 Chinese companies had publicly disclosed plans to raise $1.4bn from share sales in New York this year, Dealogic data showed, with many more filed confidentially. 

Bar chart of Funds raised by Chinese companies from IPOs ($bn) showing China tech listings drop as regulators crack down

The Securities and Exchange Commission has also stopped signing off on Chinese issuers to price their deals amid the uncertainty from Beijing and turbulent markets as global investors have rushed to sell out of companies affected by a widening clampdown on Chinese technology groups.

Companies that had prepared to list “are in a catch 22”, said a senior IPO lawyer at a US firm in Hong Kong. “The US disclosure requirements are about Chinese regulations, but that’s a billion dollar question. No one knows what the final rules will look like so they cannot craft disclosure.”

Thomas Gatley, an analyst at research firm Gavekal in Beijing, said: “The only options are to stay in the queue and wait for the finalised regulations [from China] or withdraw and attempt to list onshore or in Hong Kong.”

The incentives for listing in the US — particularly for companies in sectors such as tech that have been hit hardest by the regulations — are still “very large”, Gatley said. Those companies “are thinking the US is our last opportunity to cash out” and so would likely “hold on” for a New York listing, he added.

“The IPO window is firmly shut for now and so bankers are rushing to discuss what the options are,” said the chief executive of a large private equity firm in Hong Kong that owns a number of Chinese tech companies that were nearing IPOs in New York.

Alternatives being pitched by bankers include redirecting listings to Hong Kong, exploring a merger with special purpose acquisition vehicles, and backdoor listings, through which a company would inject its assets into a listed vehicle, according to several bankers and lawyers involved in talks.

Bar chart of First-half investment bank revenues from Chinese IPOs in New York ($m) showing China listings have delivered record fees for Wall Street banks

“This is a golden opportunity for Spacs to hunt for targets in China,” said the private equity boss. However, he said issuers would be cautious as it was not yet clear whether the new Chinese regulations would apply to Spac deals.

“Companies that had got to the finish line in the US have had to just take a pause and wait,” said a second lawyer at a US firm. “Certainly they are very anxious.” The lawyer added that Hong Kong was “not a viable option” for every issuer blocked from a US IPO due to its strict listing requirements.

Several high-profile companies in China have already publicly withdrawn their planned New York listings. Toyota-backed autonomous driving start-up Pony.ai suspended plans to go public through a merger with a Spac at a $12bn valuation, while Hellobike, a bike-sharing platform backed by Alibaba, also pulled its IPO late last month.

“These sudden regulatory changes have had a chilling effect on capital markets,” said the partner at a US law firm in Hong Kong who has worked on some of the largest overseas IPOs by Chinese companies. “China has shown that drastic policy shifts can happen overnight, it is becoming too unpredictable.”

If Chinese issuers do move ahead with US listings this year, investors are likely to be cautious after a recent sell-off in Chinese shares. Cloud Village, a music streaming service, cancelled plans for a $1bn IPO in Hong Kong this month following a disappointing response from investors.

There has not been a Chinese IPO outside of the mainland since Didi. Chinese electric vehicle maker Li Auto, which listed on Nasdaq last year, carried out a secondary listing in Hong Kong last month, but its shares have since dropped 3 per cent.

Li Auto is the latest Chinese group to create a back-up listing in case they are forced off US markets. The US is preparing regulations that would de-list companies that do not comply with its audit disclosure requirements, which Chinese authorities have long resisted.

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