International banks have warned Beijing that an overhaul of the regime for listing Chinese businesses overseas may deter them from advising on initial public offerings, which would imperil a source of funding that has powered some of the country’s best-known companies.
Asia’s top banking lobby group, whose members include Goldman Sachs, Morgan Stanley and JPMorgan Chase, has written to Chinese regulators pleading for clarity about rules that were proposed after the calamitous listing of ride-hailing app Didi Chuxing in New York last year, according to two people familiar with the matter.
The Asia Securities Industry and Financial Markets Association (Asifma) sent the letter on Sunday to highlight its “great concern” that the planned framework is “completely unclear” and raises the prospect of greater regulatory risks and higher costs for banks, according to a person familiar with the matter.
The China Securities Regulatory Commission (CSRC) announced draft rules in December following the Didi debacle last July.
International investors who bought at the IPO saw $ 40bn wiped from their shares after the listing went ahead despite Chinese regulators raising concerns about the company’s data security. Investors have since launched lawsuits against Didi and the Wall Street banks that underwrote the listing.
The proposals from the CSRC would add a layer of oversight from Beijing on top of existing global standards for underwriting IPOs. Chinese practice puts more onus on the underwriting banks for vetting the quality of companies wanting to go public.
“The industry recognizes the good intentions behind why the CSRC is doing this, but at best the framework is important and creates an added operational burden. . . and at worst banks could be caught in the middle of conflicting regulatory requirements, ”said the person familiar with the letter sent to regulators.
Banks were particularly concerned about the ability the rules would give Beijing to exercise authority far beyond its borders, the person added.
Under the proposals, a company wishing to secure approval for a plan to list abroad would have to submit documents, including its prospectus, to regulators within three days of the announcement of its intention to float. International banks that underwrite a Chinese company’s offshore listing will also be required to register with the securities regulator.
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Fang Xinghai, vice-chair of the CSRC, told the Financial Times the regulator “will properly review their comments. That is the procedure of consultation ”. He added that he had not yet personally seen the letter as it was being handled by the body’s international department.
The rules will also be applied to companies incorporated offshore as variable interest entities (VIEs), a departure from the previous regime in which only those companies incorporated in China that planned to list offshore were examined by regulators. Almost all of the largest Chinese groups that have gone public in the US, such as Alibaba, Pinduoduo and JD.com, operate as VIEs, despite it being a precarious legal structure that has not been officially recognized by Beijing.
One executive at a Wall Street bank in Hong Kong said the rules were “vague” and “ambiguous”, adding that it was unclear whether they would be applied to special purpose acquisition companies and all public markets raising capital, rather than just IPOs.
Advising Chinese companies on IPOs in the US has been a lucrative business for banks for over 20 years until the Didi fiasco led to an effective freeze on overseas listings.
“Chinese companies would suffer and China’s capital economy would change” if global banks were put off from participating in Chinese fundraisings overseas, the person familiar with the lobbying efforts said. “We sincerely believe there will be unintended consequences.”
However, they added that the banking lobby group was “not optimistic” about changing the proposals. Asifma declined to comment.