China deals with US listings | China Accounting Blog | Paul Gillis

China deals with US listings

Readers will have observed that my posts have become infrequent. I am slipping towards retirement.  My commentary on current events will move principally to my Twitter account @profgillis. A number of readers have asked for my commentary on the recent developments in China, so I will go out with this likely final post.

U.S. listed Chinese companies have found themselves in the crossfire between the U.S. and China. First the trade war, then the Holding Foreign Companies Accountable Act, then executive actions banning investment in Chinese companies tied to the PLA or Xinjiang. From the Chinese side companies have faced increased regulatory supervision with respect to anticompetitive behavior and failure to accept the primacy of the state. Most recently, DiDi has been challenged on the application of the pending data security law. It has been proposed that overseas IPOs will be subject to review prior to the IPO. Wilmer Hale has an excellent analysis of the new rules.

In my opinion, there are several factors at work here. Firstly, China is putting in place regulations that were overdue. Many of the companies have engaged in practices that hurt consumers and would never have been allowed in any developed market. When China introduces new regulations, it tends to adopt best practices from each country around the world, and this often leads to stricter rules in China than the rest of the world.  Secondly, some of the response may be a reaction to U.S. actions against Chinese companies.  For example, the data security issues on DiDi seem remarkably similar to the since rescinded Trump order on TicTok. I believe that China is disappointed that Biden has not softened the U.S stance on bilateral relations. I think China may have sent a message to U.S. investors that decoupling would likely lead to huge losses for them and is hoping these investors put some political pressure on the U.S. government.

Finally, I think the Chinese government is making it clear to private companies that the state remains primary. While the private sector in China now dwarfs the state sector in the economy and job growth, recent actions against Ant and DiDi make it clear that the party remains in charge. DiDi was probably right if it assumed that it did not need China’s permission to list in the U.S. After all it is a Cayman Islands corporation and Chinese companies began using Cayman holding companies decades ago in order to get out from under Chinese regulation. However, it is indisputable that the WFOE and VIE are completely under Chinese regulation.  

So what does this mean? We have already seen several pending IPOs cancelled or delayed. Will it be the end of US listings? I doubt that, I believe China will still want private companies to have access to foreign capital markets but will be more in control of the process. The VIE structure has long been a thorn in the side of China – it makes a mockery of its rule of law arguments, yet the only fix appears to be to relax the foreign investment rules. In a sense, the crackdown may be good for investors in these companies since approval of listing will be the first official sanctioning of the VIE structure.   

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