Plans of Chinese companies to raise capital through listings in London or Zurich face uncertainty due to new disclosure rules and restrictions imposed by Beijing, according to bankers and lawyers. The Chinese government has mandated stricter regulations, including national security reviews and limitations on the use of funds, for companies seeking overseas fundraising options. Over the past year, 18 Chinese firms have listed themselves in Zurich and London via Global Depository Receipts (GDR) as a response to escalating tensions between China and the US. More than 20 additional companies have expressed intentions to follow suit.
The newly published rules by the China Securities Regulatory Commission (CSRC) have brought GDR issuances under China’s regulatory framework for overseas listings, with requirements for national security reviews and compliance with data security. These rules coincide with China’s increased focus on national security, leading to crackdowns on consultancies and restricted access to certain information for offshore clients. Market participants anticipate that the new rules will increase costs, workload, and responsibility for underwriters involved in vetting GDR deals. The listing process is expected to become lengthier, and issuers are likely to exercise caution in choosing GDRs as a capital-raising option.
The implementation of the new rules may impact the London Stock Exchange Group (LSEG)’s plans to accelerate listings by Chinese companies and potentially slow down the rush of Chinese companies to issue GDRs on the SIX Swiss Exchange. The full impact of the rules on the SIX exchange is yet to be determined, as the situation is being closely monitored. The LSEG, which owns Refinitiv, a financial news and information business, did not provide an immediate comment.
The new regulations stipulate that GDR fundraising should be “rational” in size, with proceeds invested in line with China’s industrial policies. However, the criteria for rational fundraising are not clearly defined. The rules also introduce a restriction on issuing GDRs within 18 months of a previous share offering, impacting the timing of many Chinese companies’ GDR issuances. Moreover, companies are now required to disclose the identities of ultimate subscribers of the GDRs to address concerns of domestic entities profiting from the GDR-A share difference and prevent capital flight.
Overall, the new rules and regulations present challenges for Chinese companies seeking to raise capital through listings in London or Zurich. The increased scrutiny, compliance requirements, and limitations imposed by Beijing may lead to a more cautious approach from companies and longer listing processes. The impact on the London and Swiss exchanges remains to be fully understood, but market participants anticipate potential setbacks in the plans to expedite Chinese listings.
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