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Beijing’s plan to tighten restrictions on overseas listings of Chinese companies has caused an impact in the global financial community. This development may threaten Wall Street’s stocks worth more than 2 trillion US dollars.

But the vagueness and massive nature of the announcement on Tuesday, followed by Suppress Didi, a New York-listed ride-hailing group, has spread chaos among traders and investment bankers. Chinese companies are already reconsidering listing in the United States, which is a lucrative deal for Bank of America.

What did China announce?

The announcement came from China’s top leaders and stated that the reforms are “guided by Xi Jinping’s thought on socialism with Chinese characteristics in a new era”.

The guidelines threaten to strengthen the supervision of American depositary receipts of Chinese companies listed in the United States, and “effective measures to deal with risks and emergencies caused by Chinese ADR companies.”

Yi Huiman, chairman of the China Securities Regulatory Commission, called this “a new starting point for modernization.” [the country’s] Capital market governance system”.

But bankers and experts said the announcement indicated that it would become more difficult for Chinese companies to go public in the United States, especially those companies whose businesses rely heavily on data, if they are allowed.

“Can I see a total ban on listing in the United States? Yes,” said Fraser Howey, an independent analyst and expert on the Chinese financial system. He added that the “variable interest entity” structure used by Chinese groups to issue shares in New York may also face greater pressure from Beijing. These are offshore entities used to circumvent foreign investment rules in certain industries in China.

According to data from the US-China Economic and Security Review Commission, there are nearly 250 Chinese companies listed in New York, with a total market value of US$2.1 trillion.

What is behind this move?

The guidelines clearly point out that data is a national security issue. Investigation of Didi Just days after last week’s $4.4 billion initial public offering, it was released by China’s National Internet Information Office (CAC).

A person close to Didi said that CAC has recommended that the company postpone its listing until it conducts a data security review. Didi denied knowing that regulators planned to intervene before the initial public offering.

CAC consultant Zuo Xiaodong told local media that the United States passed a law in December last year requiring Chinese companies listed in the United States Submit to U.S. audit May cause important data to be leaked abroad.

However, legal experts said that there is currently no law that allows CAC or other institutions to intervene in overseas listings on the grounds of data security, so it is necessary to strengthen supervision.

“In the past, most Chinese companies listed on overseas markets through offshore companies [a VIE]This is completely beyond the capabilities of Chinese regulators. .. There may be some kind of reporting and review process in the future. “Said Luo Zhiyu, a partner of DeHeng Law Firm.

In March of this year, the US Securities and Exchange Commission began to introduce rules threatening to delist foreign companies from US exchanges if they fail to meet US audit standards for three years. A person involved in the negotiations stated that the United States rejected China’s proposal that its regulators conduct audits and inspections and submit their conclusions to the Accounting Supervision Committee of U.S. Listed Companies.

China’s new guidelines point out the need to “further deepen cooperation in cross-border audit supervision”, indicating that China is open to cooperation. But this confuses legal experts. “There is no ongoing audit cooperation, so there is nothing to deepen,” said a US regulatory lawyer.

Paul Leder, the former director of the U.S. Securities and Exchange Commission’s Office of International Affairs, who was directly involved in negotiations with China on audit matters, said that the wording of the cooperation was “encouraging… But the real question is whether they are willing to commit. Direct supervision of foreign audit companies required by U.S. law”.

How big is the impact?

Bankers and analysts said the new rules may threaten billion-dollar Chinese technology companies that plan to list in New York, which has a greater market depth than Hong Kong and less capital restrictions than Shanghai or Shenzhen.

“We can see that many Chinese companies are definitely reconsidering whether they should go to the United States…. Issuers are taking this more seriously,” said the Asian head of equity capital markets at a US investment bank.

“Any transaction must be completed at a huge discount,” said a partner at a leading US law firm.

The head of capital markets at a Hong Kong Wall Street bank said that bankers are preparing for the “difficult” second half of this year.

Who are the winners and losers?

Refinitiv’s data shows that the biggest losers may be Nasdaq and the New York Stock Exchange. China’s IPO on these two exchanges has raised more than US$106 billion. In recent years, these listings have become the core of Wall Street Bank’s revenue, raising approximately US$24 billion in the past 18 months.

Bruce Pang, head of research at Huaxing Capital, an investment bank, said: “For companies with offshore financing needs, from now on, their best listing destination will be Hong Kong.”

The role of foreign venture capital and private equity in funding Chinese start-ups means that technology groups will continue to face pressure to list outside mainland China, beyond their strict capital controls.

“For large companies and [IPOs] Ready. .. You will go to Hong Kong right away,” said the head of Asian equity capital markets.

What happened next?

The broad language of the guidelines means that regulators may intervene slightly in law enforcement, but those interviewed by the Financial Times were skeptical.

The US law firm partner said: “Regardless of the direct impact on Didi, listing in the US is now a warning story for Chinese companies and US investors.”

“More and more companies will be forced to delist [from the US] And in Hong Kong for stock repurchase and simultaneous listing,” said Howe, a Chinese financial expert.

He added that if the heads of a large Chinese technology group listed in the United States resist any delisting actions, they may face serious consequences. “If I were a Chinese internet celebrity, I would be very worried that I would be locked in a cell.”

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