In the last two decades, the Chinese stock market has attracted more and more investors, from Warren Buffett’s Berkshire Hathaway to Bill Ackman’s Pershing Square. They have been attracted by the enormous size of the market, the growth of that market, and the possibility of making outsized gains. Chinese startups, sensing the appetite for Chinese securities, have found ways to list in Western markets, despite the significant regulatory difficulties. Over the last decade, they have used variable interest entities (VIEs) to get around Chinese laws preventing them from listing overseas. Yet, with President Xi Jinping’s recent crackdown on tech startups listed in the West, the Chinese IPO pathway has been rewritten. Finews Asia discusses this new paradigm in a thoughtful piece written by the editors.
Many investors in Chinese companies either do not know or ignore that it is technically impossible for foreigners to own shares in Chinese companies. Chinese IPOs have gotten around this through VIEs, complex structures that have agreements with Chinese companies, and what investors are investing in when they say they have bought into a Chinese firm. However, this tenuous ownership has recently been brought into question, leading some investors to wonder if The Chinese government will ban vIEs.
Doubts over investments in China began as President Xi signaled that he wanted to reign in tech giants. At first, this was seen as a singular response to Alibaba founder Jack Ma’s criticism of the Chinese Communist Party. However, it soon became clear that the crackdown went beyond an effort to try and reign in Jack Ma. China showed that it was concerned that overseas tech companies would give American regulators access to sensitive Chinese data. Another issue is that corruption and inequality have become significant concerns for the Chinese government after decades of economic growth. Tech firms have responded by pledging to give away substantial portions of their revenue to help with developmental issues and narrow inequality.
All this has happened in a climate of rising antipathy and distrust between the Chinese and U.S. governments. Although tensions started to erode significantly under President Donald Trump, they have continued to deteriorate under President Joe Biden.
The pathway for Chinese overseas IPOs is facing pressure from both the Chinese and American ends. In the American future, there are concerns about Chinese accounting practices and the possibilities of fraud. To date, many Chinese firms are not in compliance with American standards and have not allowed the federal government to audit them. If they do not agree to this, there is a possibility that they will be forced to delist from American markets as soon as 2024.
As explained above, the government has been concerned about tech giants giving American regulators access to sensitive data on the Chinese end. Another issue is that although China is the second-largest economy in the world, in many ways, the country is still a developing country, and its regulations have not caught up with the speed of development. From the forestalling of Ant Financial’s IPO to date, the Chinese government has attempted to create the regulations it believes should govern its economy. For investors, this means there will be a lot of disruption and uncertainty as China makes the rules to oversee its economy.
Someone told me that the Chinese character for crisis is also the character for opportunity. So I visit the best tattoo shops and see if I can have that tattooed…