Chinese regulator aims to direct mainland IPOs to Hong Kong

Recent regulatory revisions by the CSRC aim to encourage mainland companies to seek IPO in Hong Kong.

April 18, 2023

The China Securities Regulatory Commission (CSRC) aims to encourage more mainland Chinese firms to list in Hong Kong, as part of its wider aim to further integrate Hong Kong’s financial markets with China.

In February, the securities watchdog announced a series of  accommodative regulatory updates aimed at spurring participation by mainland Chinese companies in the Special Administrative Region’s (SAR) listing schemes, but analysts hold mixed opinions on whether these regulations will actually result in more IPOs.

The importance placed by the CSRC on expanding cooperation with Hong Kong’s capital markets was underscored last month at meetings in Beijing involving CSRC chairman, Yi Huiman,  Hong Kong chief executive, John Lee Ka-chiu, and representatives Tim Lui Tim Leung and Julia Leung Fung Yee, from Hong Kong statutory body, the Securities and Futures Commission (SFC).

Building on the aspirations outlined at China’s “Two Sessions” in Beijing at the start of March which support domestic innovation and the opening up of the market to foreign investment, Lee and Leung acknowledged that Hong Kong should leverage its international market to further integrate with China’s development. Additionally, the parties agreed to enhance cooperation across green and sustainable finance, alongside a push to advance their capital markets.

Effective from the end of March, the new regulations published by the CSRC permit mainland-based companies to participate in any overseas listings venue, provided that they make certain filings with the regulator and complete a review process.

“The new regulations enhance market confidence and encourage more Chinese companies to list abroad (including in Hong Kong), as they provide more specific and clearer guidance and set out more objective requirements,” Yang Yingfei, a partner at Baker McKenzie Fenxun, a Sino-foreign joint venture law firm, told FinanceAsia.

Additionally, the new regime transfers responsibility for meeting foreign stock exchange requirements from the regulator to the issuer.

“The new filing regime offers much clearer guidance, which in turn provides Chinese companies greater certainty during the process of overseas offering and listing. Overall, the purpose of the new regulations is to ensure that China stays open to foreign markets while it improves its own regulation,” Yang said.

“This will enhance the transparency and predictability of filing procedures, and in turn, will improve market confidence,” he added.

However, it is difficult to ascertain whether these new regulations will impact the number of IPOs sought by mainland firms in Hong Kong, explained Frank Bi, partner at Ashurst.

“The registration procedure will certainly incur additional steps for listing applicants to fulfil,” he told FA.

Bi noted that it remains to be seen whether or not registration is simply procedural, or if it will involve substantial review: “ We need more (clarity) from the CSRC to provide practical insights and guidance, which could potentially discourage more Chinese companies to go IPO overseas.”

But the new CSRC filing regime will streamline both the direct and indirect overseas listings of securities by mainland Chinese issuers and clear up certain uncertainties facing the mainland issuers and professionals involved, explained an article written Hong Kong-based legal experts at Mayer Brown, including FA editorial board member, Thomas Kollar. 

“Although it remains to see how this will play out in practice, these new rules represent an encouraging step in the right direction for development of the capital markets for PRC issuers.”

However, the piece advised that “It is hard to see how these additional layers of on-shore regulatory review and compliance burden will not impact the overall deal timeline.”

State secrets and data security

The documentation requirements of the new CSRC filing regime are similar to those of previous application processes such as H-share listings, except for the addition of a newly proposed national secrecy and data security review, the Mayer Brown team wrote.

Data security has become a major concern for the Chinese government, as illustrated by the Cyberspace Administration of China’s (CAC) move to fine ride-hailing app, Didi, $1.2 billion in July 2022, for breaching Chinese data security laws a year earlier.

Amid frayed Sino-US relations, the Chinese government is supporting its effort to decouple relations with the US by doubling down on security controls over private companies, Andrew Collier, managing director of Hong Kong-based business consultancy, Orient Capital Research, told FA.

“The Chinese Communist Party (CCP) is intent on ensuring that private firms have tight controls over data that is closely monitored by the government. We are seeing more involvement in the Party in board memberships and management control in private firms and this is reflected in the security domain as well,” Collier said.

Bi predicts that with the end of the Covid-19 pandemic, more Chinese companies will seek to list overseas this year, including in Hong Kong.

“It is therefore sensible for the Chinese government to place more regulations on state secrets and data security, in particular with a potential return to prominence of the Technology, Media and Telecommunications (TMT) industry.”

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