China’s diverting IPO windfalls from the US to Hong Kong

Strong pipeline.
Strong pipeline.
Image: Reuters/Bobby Yip
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One message is coming through ever more clearly from China’s increasingly sprawling crackdown on ride-hailing giant Didi Chuxing: Consider Hong Kong.

That’s starting to look like less of a preference and more of a directive.

China’s internet regulator, the Cyberspace Administration of China (CAC), has proposed changes that would require companies with over 1 million users that want to list overseas to go through a review by its Cybersecurity Review Office, making it an additional gatekeeper for IPOs abroad. The proposal followed on the heels of the regulator’s launch of probes into Didi, which listed on the New York Stock Exchange on June 30 and almost immediately faced harsh regulatory scrutiny in China because of its alleged violation of rules related to the handling of user data. Didi has said it accepts and firmly follows instructions from regulators, and also says it stores all Chinese user and transport data in the country.

Bloomberg today (July 16) reported that China is considering exempting those companies that want to list in Hong Kong from the cybersecurity review process, which would make it far less tedious to list on the Hong Kong exchange than in the US. Companies listing in Hong Kong would still need to be vetted by the CAC and obtain approval from the Chinese securities watchdog under the new framework being considered by Beijing, according to the outlet. But without the cybersecurity review, the shorter waiting time and lower compliance costs could motivate more firms to choose Hong Kong, which last year ranked second after the Nasdaq for IPO fund-raising.

China is keen to show Hong Kong remains a top-tier financial hub despite a wide-ranging political crackdown there in the past year. The report regarding the cybersecurity review exemption comes the same day the US is expected to issue a warning to businesses about the risks of doing business in Hong Kong due to the national security law.

Yet despite Beijing’s desire for its tech firms to have “homecoming” listings, and a sharp increase in US regulatory scrutiny of Chinese firms listing there, a large number of Chinese firms nevertheless chose to list in the US this year, with Didi being the most prominent among them. The first six months of this year saw a larger number, and higher dollar volume of listings of Chinese firms in the US, than any year in the last decade. Even compared with full years, 2021 saw a greater amount raised by Chinese firms listing in the US than any year except 2014 (the year Alibaba went public).

Beijing’s probe into Didi reflects worries that listing overseas presents a national security risk. On Friday (July 16), the internet regulator and another six departments including the tax bureau and transportation department began an on-site inspection at Didi as part of the cybersecurity probe into the firm.

Authorities are concerned that such transactions could result in user data flowing overseas, or even into the hands of foreign governments, in violation of Chinese rules requiring that such data be kept in China. It’s a mirror image of the concerns expressed by the US that Chinese financial control of apps such as the dating app Grindr, or video platform TikTok, pose a threat to national security by potentially creating an avenue for Chinese authorities to access US user data.

Certainly, investors appear to think the developments of the past month are good for the HKEX. While billions of dollars of value have been shaved off the market caps of Chines firms listed in the US, the Hong Kong stock exchange has seen its own share price rise nearly 15% since the day law enforcement action began against Didi.