A man walks with a dog in the shade, away from the midday sun, past the New York Stock Exchange (NYSE) building in Manhattan, during hot weather in New York City, New York, USA, August 11, 2020.
Fresh Mike | Reuters
BEIJING – Chinese authorities this week announced new guidelines to support venture capital, raising hopes for faster approval of initial public offerings in the near future.
A once-burgeoning ecosystem of investment capital and startups in China has slowed dramatically over the past three years due to increasing regulatory scrutiny.
In one of the latest efforts to shore up the industry, China’s top executive body, the State Council, released high-level measures to “promote high-quality venture capital development” late on Wednesday.
“Everything will depend on the implementing regulations,” said Marcia Ellis, global co-chair of the private equity practice at Morrison Foerster.
“It is positive that the government has recognized at a central level that there is a problem,” Ellis said. “At least in terms of investing in technology, venture capital can be a positive force in the market in China, which can frankly help China compete with the US in the technology race.”
As for actions to watch, Ellis said, “What we’re really looking for with IPOs is that approvals will happen more quickly.”
“Venture capital investors will not make investments unless they see a reasonably clear path to exit,” she said, noting that this has not been the case in the last year or so.
The new policy included a section on expanding exit channels for venture capital, with a focus on supporting companies with technological breakthroughs. The measures also called for introducing a management system for foreign listings and smoothing exit channels for non-yuan-denominated venture capital funds.
“The real bottleneck in overseas listings is the overseas IPO process and foreign exchange rules,” said Winston Ma, an associate professor at NYU School of Law.
The pace of public offerings both domestically and internationally has slowed. Investors, particularly those who invest U.S. dollars in China-based venture capital funds, prefer IPOs in the U.S. as the largest and most liquid market.
Looking ahead, “the market is watching the speed of IPO approvals in the US,” Ming Liao, founding partner of Prospect Avenue Capital, said in Chinese, translated by CNBC.
Challenges for IPOs abroad
Chinese authorities tightened their control and introduced new rules for overseas IPOs after ride-hailing company Didi listed in the United States in 2021, despite reports that a government investigation was underway. Separately, the US has tightened its control over US capital flowing into China, particularly military-related companies.
Previously, a lack of regulation had also led to a number of high-profile fraud cases involving Chinese companies’ initial public offerings in the United States
Morrison Foerster’s Ellis warned that the new policy broadly encourages companies and research institutions to participate in venture capital.
“Unfortunately I think if companies that aren’t professional investors start doing this and do this because they’re encouraged by the government to do it, it can just be more damaging to the market in the long run because they’re going to lose money and it goes .” “It will tarnish the venture capital market in China,” Ellis said. “You need professionals for that.”
The China Securities Regulatory Commission has increased fines for misleading investors and clarified requirements for overseas IPOs. Updated rules were announced last year, effective March 31, 2023, saying domestic companies must comply with national security measures and the Personal Data Protection Act before going public abroad.
Since then, 73 companies have gone public in the United States and 85 in Hong Kong, Commission Vice Chairman Fang Xinghai said during a conference on Wednesday, according to state media.
The speed of IPO processing has not been fast enough and is being accelerated, Fang said in the report, adding that the commission supports mainland Chinese companies listing abroad, particularly in Hong Kong.
Fast fashion giant Shein, which has sought to distance itself from its Chinese roots, has reportedly shifted its plans for a US listing to one in London due to regulatory scrutiny.
VCs in China for China
China has also tried to develop its domestic stock markets, which are only about 30 years old.
Morgan Stanley equity analysts on Wednesday noted separate comments from Wu Qing, head of China’s securities regulator, that capital markets should increase their targeted support for companies in line with the country’s efforts to develop new technologies.
“We believe this means capital markets could welcome more diverse IPO candidates as long as they can demonstrate innovation and drive productivity growth, although IPO volumes may remain low in the near term as higher standards also apply,” the report said from Morgan Stanley.
Wu took over as head of CSRC in February following a volatile decline in mainland stocks. Since then, markets have recouped their losses year to date.
The new policy also called for supporting international investment institutions to set up yuan-denominated funds.
“If foreign funds could more easily set up RMB funds, then there are funds that want to do that,” Ellis said.
“There are many China-focused funds headquartered in Asia,” she said. “They are USD funds, but their management companies also want to manage onshore RMB funds because they think they can actually raise money in China for China investments, whereas now it is very difficult to get USD out of the US and possibly Europe for China-focused funds.”
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2024-06-21 04:57:05
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