Chinese overseas listing rules reduce market uncertainty

China’s plan to increase scrutiny on overseas stock sales by domestic companies should ease the regulatory uncertainty that has clouded financial markets this year and crippled offshore listings, bankers and analysts said.

But the securities regulator’s new filing-based system, designed to control once-liberal Chinese listings in US and elsewhere markets, leaves open questions about the application of rules and compliance criteria, they added.

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

China’s Securities and Regulatory Commission published a bill on Friday night requiring registrations of companies seeking overseas listings under a framework to ensure they comply with Chinese laws and regulations.

Companies that use the so-called variable interest entity (VIE) framework will still be able to seek listings abroad as long as they comply, eliminating the uncertainty for investors who fear that China will block such listings.

That risk was heightened after Didi Global’s listing in July sparked a major regulatory backlash from Chinese authorities concerned about national security.

The VIE framework has been used by most overseas listed Chinese technology companies, such as Alibaba and JD.com, to circumvent Chinese restrictions on foreign investment in certain sectors.

Uncertainty about the future of VIE structures, coupled with China’s regulatory crackdowns in key sectors such as e-commerce and mentoring, has wrecked the shares of overseas-listed Chinese companies this year.

And while Chinese companies raised $12.8 billion in the US this year, the value of the business was halted after Didi’s listing in July. In Hong Kong, the value of IPOs in 2021 dropped to $26.7 billion from $32.1 billion a year earlier, according to data from Refinitiv.