China’s offshore rules to cut uncertainty

China’s plan to tighten scrutiny over mainland companies’ overseas share sales is likely to ease the regulatory uncertainty that roiled financial markets this year and stalled offshore listings, bankers and analysts said.

But the securities regulator’s new filing-based system, designed to rein in once freewheeling Chinese listings in the U.S. market and elsewhere, leaves open questions about rule enforcement and compliance criteria, they added.

“The new rules represent a comprehensive, systemic and market-oriented regulatory upgrade,” investment bank China International Capital Corp. (CICC) said in a note, but added they contain “some items that need further observation, and clarification”.

The China Securities and Regulatory Commission published draft rules late on Friday requiring filings by companies seeking offshore listings under a framework to ensure they comply with Chinese laws and rules.

Companies using a so-called variable interest entity (VIE) structure will still be allowed to seek offshore listings as long as they are compliant, removing uncertainty for investors who feared China would block such listings.

That risk loomed large after Didi Global Inc.’s U.S.listing in July sparked a major backlash from Chinese officials, who were concerned over national security.

The VIE structure has been used by most overseas-listed Chinese tech companies, such as Alibaba and JD.com, to skirt Chinese restrictions on foreign investment in certain sectors.

Uncertainty over the future of VIE structures, coupled with China’s regulatory crackdowns in major sectors such as e-commerce and tutoring, has bashed shares in offshore-listed Chinese companies this year.

And while Chinese firms raised $12.8 billion in the U.S. this year, the value of deals ground to a halt after Didi’s July listing. In Hong Kong, the value of IPOs in 2021 fell to $26.7 billion from 2020’s $32.1 billion, according to Refinitiv data.

Regulatory coordination

Reaction to the new rules will be seen Monday when the U.S. stock market resumes trade after closing on Friday for the Christmas holiday. Hong Kong stocks will resume trading on Tuesday.

The filing-based system is also expected to ease uncertainty by calling for closer coordination between the securities regulator and industry regulators, such as the cyberspace watchdog.

“The issuance of the draft rules shows that major communication obstacles have been removed between different regulatory bodies,” said Ming Jin, managing partner at Chinese investment bank Cygnus Equity.