China ‘s crackdown puts at least 70 IPOs, billions in commissions on ice Bank news

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A few months after bankers held a record for making Chinese companies public in New York and Hong Kong, they have had a rude awakening. Bids are being filed and investors are suffering huge losses.

After a fortnight in which China repressed its Uber-like Didi Global Inc., just days after a commercial debut in the United States, a global chill was resolved, quickly followed by the State Council which announced a more detailed examination of all offshore quotes. A cybersecurity review for companies with data on more than a million users was proposed on Saturday before looking for listings in foreign countries.

The warning signs had been blinking for some time. As insurers hit a record $ 1.5 billion in fees last year to help Chinese companies with initial overseas bidding, relations between China and the United States shrank. In December, Donald Trump signed a bill that could remove Chinese companies that do not comply with audit inspection rules. Simultaneously, President Xi Jinping stepped up oversight of large technology companies, in part to secure the treasury of data they control.

The moves jeopardize the frantic negotiation that took place during the pandemic and the lucrative offshore listing business that earned about $ 6.4 billion in commissions since 2014, when Alibaba Group Holding Ltd. began trading in New York. Morgan Stanley, Goldman Sachs Group Inc. and China International Capital Corp. they topped the league tables during that stretch, when nearly 40 percent of the commissions came from U.S. bids.

Bankers now say they expect most Chinese IPOs destined for U.S. stock exchanges to be suspended or diverted elsewhere, entering the projected revenue for the year given the significantly lower rates in Hong Kong. The quotation requirements in the financial center and in mainland China are also stricter, which means that there are no certain offers.

“There are some uncertainties that can take a month or two to follow,” said David Chin, head of investment banking in Asia Pacific at UBS Group AG, about China’s changing rules in a briefing. from last week. “Ultimately, China will find a solution because the US has given a lot of support to Chinese internet companies, their development and subsequent financing.”

Meanwhile, what had been a healthy IPO pipeline is weakening. An immediate victim was LinkDoc Technology Ltd., a Beijing-based medical data company, that halted preparations for a U.S. IPO on Thursday.

The Fitness Keep app has also opted not to continue with a planned public presentation in the United States, the Financial Times reported. The application for podcasts The US IPO of the Ximalaya is also on the brink, according to people who know about it. Other agreements that could be questioned include the $ 1 billion potential IPO of Hong Kong delivery firm Lalamove.

In total, China’s crackdown on foreign exchange is threatening some 70 private companies based in Hong Kong and China that will be listed in New York, according to data compiled by Bloomberg.

Valuations from China’s tech companies, which were already falling before the recent onslaught, now look more shaky as investors indicate they will ask for stronger discounts to buy shares, said a banker, who did not ask domestic entrepreneurs to discuss. So far this month, the Nasdaq Golden Dragon Index, which tracks some of the largest Chinese companies listed in the U.S., has released about $ 145 billion in value.

At the heart of the recent crackdown is the extent to which regulators will go to check foreign investment in sensitive industries, particularly those that control large amounts of data. For two decades, China’s technology giants have set aside restrictions, using the so-called variable-interest entity model to attract foreign capital and IPO.

China’s Securities Regulatory Commission is now leading efforts to review overseas listing rules that would force VIE companies, which do business in China but are registered in places like the Cayman Islands, to gain approval. before selling shares abroad, Bloomberg reported. The China Cyberspace Administration said Saturday that its proposed review would address the risks of data “affected, controlled and maliciously exploited by foreign governments.”

Reduced rates

Hong Kong is well positioned to benefit from geopolitical and regulatory frictions, although business negotiations at the financial center may also be embroiled in the regulatory push. If the IPOs of Chinese unicorns stop, Hong Kong’s exchange should continue to be driven by secondary listings and the conversion of U.S. depository receipts, according to Bloomberg Intelligence analyst Sharnie Wong.

“Some Chinese companies operating in sensitive sectors may be thinking of trading in Hong Kong instead of the United States,” said Kenneth Ho, general manager of capital markets at Haitong International. “Currently, the IPK HK pipeline is ridiculously vibrant.”

The change of course will reduce the commissions banks can earn after a decade in which Chinese companies raised about $ 76 billion from first-time stock sales in the United States.

Banks typically charge between 1.5% and 2% for billion-dollar deals in Hong Kong, compared to 3% to 5% in the U.S., as commissions vary by industry and insurer . That raises about two percentage points or more for bids below $ 500 million, bankers familiar with the matter said.

In mainland China, fees for listing on the Shanghai STAR Board are almost the same in the US, but sponsors must invest between 2% and 5% of the shares issued by their clients, an unusual deal that may limit the interest in leading operations due to the need for a ground capital base.

The stricter regulatory regime opens in the context of China’s opening of its financial market to allow foreign banks and asset managers to set up wholly owned companies. Power plants such as Goldman Sachs have been increasing their workforce, trying to double or triple its workforce in mainland China as they expand to capture billions of potential profits in the world’s second-largest economy.

The Chinese STAR market, similar to the Nasdaq, has made it easier for technology companies to access financing from home, while emphasizing companies focused on the most advanced technology and innovation.

The Chinese capital’s reliance on foreign capital to feed its businesses has declined from where it was less than a decade ago, said Martin Chorzempa, a senior member of the Peterson Institute for International Economics. “We are in a world where Chinese companies are not so difficult to raise a large amount of capital without listing their shares on board.”

Still, Chin of UBS said it is doubtful that many Chinese companies will meet the national listing requirements, which have become stricter this year.

“Ultimately, they will have to list elsewhere,” he said. “We are very accustomed to this kind of regulatory development and uncertainty and ultimately business logic will prevail and funding and IPOs will continue.”





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