Chinese corporate financing is in trouble


Chinese corporate financing is in trouble

On October 17, 2022, people walked past office buildings in the Lujiazui Financial District in Shanghai, China.

SHANGHAI/HONG KONG – Chinese companies are facing the prospect of a shortage of new equity capital as tighter domestic IPO rules and challenges with overseas listings severely curb financing, posing risks to the troubled economic recovery.

China's securities regulators have sharply tightened scrutiny of IPOs this year, causing companies to abandon domestic listing plans, with some turning to offshore markets such as Hong Kong and New York.

However, tighter scrutiny of IPOs in the United States against a backdrop of geopolitical tensions and a weak Hong Kong market will hamper many overseas listings, as highlighted by Alibaba's move this week to abandon plans for a Hong Kong IPO of its logistics unit. a little.

Preliminary data from LSEG show that between January and March 2024, funds raised through Chinese IPOs plunged by two-thirds from the same period a year ago to just US$2.4 billion, the smallest quarter since the fourth quarter of 2018 The amount of financing decreased by 82% compared with the same period last year.

Read: Regulatory logjam over Chinese offshore listings affects companies' financing plans

The world's largest IPO market in 2023 and 2022 suddenly froze after securities regulators under new chairman Wu Qing vowed to step up scrutiny of listing candidates and crack down on any missteps.

Qian Ande, chief executive of Xintong Capital, a Shanghai-based investment and consulting firm, said the tightening of IPOs “will make it increasingly difficult for small companies to raise funds” and the exit of private equity investments will become increasingly difficult.

“IPOs in China will become a scarce resource,” said Qian, who is now helping some companies list on Nasdaq.

Drivers of China’s economic growth and employment

For venture capitalists, exit difficulties will in turn lead to financing difficulties, and “investing in early-stage, small, high-tech companies will become increasingly difficult,” Qian said.

These companies are key drivers of China's economic growth and employment.

The sharp slump in IPOs comes as mainland stock markets have lagged behind global equities for three consecutive years, tumbling early this year as deflation reached levels not seen since the 2008-09 global financial crisis.

Read: Chinese company cancels IPO plans due to listing review

For small businesses, primarily technology startups, raising debt and private capital is also difficult due to the early stages of their business models and weaker credit profiles. This may leave some with little choice but to rein in growth plans and cut costs.

“When the economy slows down, the capital market should be used to help companies tide over the difficulties as soon as possible,” said Yang Chongyi, a financial consultant who helps Chinese companies list overseas.

However, so far this year, the Shanghai and Shenzhen stock exchanges have accepted zero IPO applications.

China this month unveiled a series of rules to increase scrutiny of initial public offerings, listed companies and underwriters. In addition, it has restricted IPOs to reduce the supply of shares and ease volatile selling pressure in the secondary market.

Tighter scrutiny

As tighter scrutiny and shrinking liquidity raise uncertainty about domestic listings, many companies have given up on listing hopes – more than 80 Chinese IPO candidates have terminated domestic listing plans so far this year.

One banker, who asked not to be named, said companies and underwriters were now “scared” to apply because “once you submit an application, you can easily be penalized for fraud or negligence as regulators start poring over the materials.” .

The banker said he was advising some clients to move overseas.

Data from the China Securities Regulatory Commission shows that 38 Chinese companies have applied for overseas listings so far this year.

Five of the companies, including Kepney Holdings Inc. and Joaquin (China) Holdings Ltd., plan to list in the United States, while the rest have their sights on Hong Kong.

“The Hong Kong stock market has more certainty. Or in other words, this market has very clear rules,” said Tang Jinghua, chairman of Shanghai Shengxun Information Technology Co., Ltd., which received approval from the China Securities Regulatory Commission this month.

Tang said the company will still seek a mainland listing in the future.

Uncertainty about the overall approval process

Jiangsu Guofu Hydrogen Equipment Co., Ltd., another Chinese company seeking a Hong Kong listing, said it canceled its listing in Shanghai “given the uncertainty of the overall approval process,” according to a March 20 exchange filing. plan of.

However, U.S.-China tensions and a weak Hong Kong market won't make offshore listings easier – Alibaba abandoned plans to list its Cainiao subsidiary in Hong Kong, citing poor trading in the “overall capital market environment.”

Chinese companies also need to go through a regulatory approval process launched last April to list offshore.

“In the next few years, there will be very little chance for Chinese startups to IPO domestically,” said a senior executive of a Chinese private equity firm in Shanghai.


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Leveraging offshore capital is also difficult because “the Hong Kong market is relatively small and less liquid, while listing in the U.S. will not become mainstream due to geopolitical factors.” The upcoming U.S. election is another source of uncertainty,” The executive added.





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