Chinese corporations are staring at the prospects of a drought of latest fairness capital as harder home IPO guidelines and challenges in itemizing abroad severely curb their fundraisings, placing at threat the floundering financial system’s restoration.
China’s securities watchdog has sharply tightened scrutiny of IPOs this yr, resulting in corporations scrapping home itemizing plans in droves, with some turning to offshore markets such as Hong Kong and New York.
However, sharper scrutiny of IPO hopefuls in the U.S. amid geopolitical tensions and a weaker Hong Kong market will stymie offshore listings for a lot of, highlighted by Alibaba’s transfer this week to ditch the Hong Kong IPO plan of its logistics unit.
During January-March 2024, cash raised by way of China IPOs plunged two-thirds from a yr in the past to simply $2.4 billion, the smallest quarterly fundraising because the fourth quarter of 2018, and down 82% from a yr earlier, preliminary LSEG knowledge confirmed.
The sudden freeze of an IPO market that was the world’s largest in 2023 and 2022 comes after the securities watchdog, beneath new chairman Wu Qing, vowed to step up scrutiny of itemizing candidates and crack down on any lapses.
The IPO tightening “would make it increasingly difficult for small companies to raise capital” and for personal fairness funding to exit, mentioned Andrew Qian, CEO of Shanghai-based funding and advisory agency New Access Capital.
“IPOs in China will become scarce resources,” mentioned Mr. Qian, who’s now serving to some corporations listing on Nasdaq as a substitute.
For enterprise capitalists, the problem to exit will, in flip, result in problem in fundraising, and “it would be increasingly challenging to invest in early-stage, small, hi-tech companies”, mentioned Mr. Qian.
These are the sorts of corporations which are the essential drivers of financial progress and employment in China.
Raising debt and non-public capital is hard too for small-sized corporations, primarily know-how startups, on account of their early-stage enterprise fashions and weaker credit score profile. This is more likely to depart some with little alternative aside from to rein in progress plans and lower prices.
“When the economy is slowing, you should make use of the capital markets to help companies wade through difficulties as soon as possible,” mentioned Yang Chongyi, a monetary adviser who helps Chinese corporations listing abroad.
So far this yr, although, the Shanghai and Shenzhen inventory exchanges have accepted zero IPO functions.
Tighter scrutiny
China this month unveiled a algorithm to tighten scrutiny over IPOs, public corporations and underwriters. In addition, it curbed IPOs additionally to scale back fairness provide and ease promoting stress in a wobbly secondary market.
With the tighter scrutiny and shrinking liquidity triggering uncertainty about home listings, many corporations are giving up hopes to listing—greater than 80 IPO candidates in China have terminated their plans to listing at home to this point this yr.
Companies and underwriters “dare not” apply now as “once you hand in your application, you become vulnerable to punishment for fraud or negligence as regulators start poring over the materials,” mentioned a banker on situation of anonymity.
The banker mentioned he’s advising some shoppers to go offshore.
So far this yr, 38 Chinese corporations have utilized to listing abroad, in keeping with knowledge from the China Securities Regulatory Commission (CSRC), which vets such share gross sales beneath a one-year-old submitting system.
Five of them, together with Kepuni Holdings and Huajin (China) Holdings Ltd, are aiming for a U.S. itemizing, whereas the remainder are eyeing Hong Kong.
“There’s more certainty in Hong Kong’s stock market. Or put it another way, there’ re very clear rules in that market,” mentioned Tang Jinghua, chairman of Shanghai Voicecomm Information Technology Co, which acquired CSRC’s nod this month.
Tang mentioned the corporate will nonetheless search a mainland itemizing in future.
Jiangsu Guofu Hydrogen Energy Equipment Co, one other Chinese firm in search of a Hong Kong itemizing, mentioned it scrapped a plan to listing in Shanghai “considering the uncertainty of the overall vetting process” in keeping with an trade submitting on March 20.
Sino-U.S. tensions and weaker Hong Kong markets are, nevertheless, not going to make offshore itemizing simpler—Alibaba dropped plans to listing its Cainiao unit in Hong Kong citing dour “overall environment for doing capital markets” offers.
Chinese corporations additionally have to undergo a regulatory approval course of, kicked off final April, to listing offshore.
“In the next few years, the chance of a domestic IPO is slim for Chinese startups,” mentioned a Shanghai-based government at a Chinese non-public fairness agency, who declined to be named as he was not authorised to talk to the media.
Tapping capital offshore can also be troublesome as “the Hong Kong market is relatively small and illiquid while listing in the U.S. won’t become mainstream due to geopolitical factors. The upcoming U.S. election is another source of uncertainty,” the manager added.
