Companies face headwinds – Hong Kong IPOs more attractive

Peking, New York, Washington The Chinese regulators continue to put their tech companies under pressure. As the powerful cyberspace regulator Chinese Administration of Cyberspace (CAC) announced on Saturday, companies with data from more than one million users will be checked separately for their security before they are allowed to issue shares on a foreign stock exchange.

The focus will be on whether the data could be “influenced, controlled or manipulated” by foreign governments after an IPO abroad. The limit of one million users is quickly reached in the country with 1.4 billion inhabitants.

The move is therefore likely to affect most of the Chinese tech companies that want to go public. Experts believe that in the future more Chinese companies will prefer an IPO in Hong Kong to an IPO abroad – and so the decoupling of the financial markets will proceed.

The new regulatory reviews come at the end of an exciting week for Chinese companies in the US. In addition, relations between Washington and Beijing are already very tense. Instead of converging, the two financial centers and economies are developing further apart.

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The recently listed shares of the Chinese car service Didi on Wall Street fell dramatically this week because China banned the sale of the app online. The supervisory authority cited violations in the collection and use of data as the reason.

On Friday, Beijing extended the ban to 25 other Didi-related apps.

The action against Didi and the announcement of stricter regulation for IPOs by Chinese companies abroad are also unsettling investors: The stock exchange index for Chinese companies listed in the USA, the S & P / BNY Mellon China Select ADR Index, lost almost eight percent this week. Didi alone lost almost 20 percent.

Gloomy prospects for further Chinese IPOs in the USA

As a result, the prospects for future IPOs have also deteriorated. The Chinese company Linkdoc has already postponed the IPO planned in the USA. The start-up, which analyzes medical data for cancer treatment, originally wanted to issue 10.8 million shares valued at up to 210 million dollars on Thursday after the market closed.

According to data from the Bloomberg news agency, around 70 other private companies based in Hong Kong and China that want to go public in New York could be affected by the stricter action of Chinese regulators. “These rules will encourage Chinese Internet companies to go public in Hong Kong rather than any other country in order to avoid these tests,” commented Feng Chicheng, partner at the research company Plenum.

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For start-ups in particular, an IPO in New York has so far been often more attractive than in Hong Kong, as the Chinese special administrative region has higher hurdles with regard to the size and profitability of companies than on Wall Street.

The Chinese government had generally cracked down on technology companies in recent months. It wants to break the power of the largely unregulated giant corporations over billions of data, regulate monopolies more closely and bring them under the control of the Communist Party.

In the future, the Chinese supervisory authorities will not only take a closer look at IPOs. For some time now, they have also been more restrictive when it comes to approving mergers in the tech industry. For example, the State Administration for Market Regulation (SAMR) banned the Chinese technology giant Tencent from merging the People’s Republic of China’s leading video services Huya and Douyu on Saturday.

Joe Biden

When it comes to China, the US President is continuing the tough course of his predecessor Donald Trump.

(Photo: AP)

The excitement surrounding Chinese companies trading in the US comes at a time when relations between Washington and Beijing are already extremely tense. Not much has changed in that with the change in the White House. When it comes to China, US President Joe Biden is continuing the tough course of his predecessor Donald Trump.

The White House condemned the imprisonment of millions of Uyghurs in China as “genocide” early on in Biden’s tenure. The US President also takes every opportunity to affirm that competition with China for future technologies will “determine the 21st century”. The punitive tariffs against China remain in place, and there is no continuation of the trade talks in sight. It is only at the G20 summit in autumn, so it is said in Washington, that Biden and Xi Jinping could meet again for the first time.

Added to this are the recent blockades due to alleged human rights violations and surveillance in Xinjiang. On Friday, the US government put 14 companies from the region in western China on an entity list. This is a black list with high hurdles for the American market.

The US Department of Commerce justified the move with “human rights violations, repression, mass imprisonment and high-tech surveillance against Uyghurs, Kazakhs and other members of Muslim minority groups”. Several dozen companies from Russia and Iran that are supposed to support China’s military program also landed on the list.

Companies that are on the American Entity List must apply for new licenses from the US Department of Commerce and are subjected to a strict review. This can delay the delivery of components by months or stop it permanently.

A few weeks ago, the USA had blacklisted some Chinese companies from Xinjiang and blocked some of the solar imports. The region produces around half of the global supply of polysilicon used for semiconductors and solar modules.

China threatens punitive measures

According to reports from UN experts and human rights groups, more than a million people have been detained in Xinjiang in recent years. China rejects allegations of genocide and forced labor and announced unspecified countermeasures. The government recently passed a law that makes it legal on paper to punish companies in China for complying with foreign sanctions. Beijing also has a black list of “unreliable” companies, but so far there is none.

The recent measures from Washington may just be the beginning of further penalties. Washington and Beijing regularly clash, for example in the conflict over Taiwan or investigations by American secret services into the theory that the coronavirus was bred in a Chinese laboratory. However, the US president has to weigh up many interests against each other.

The global fight against climate change can hardly be achieved without China. The green energy transition in the US is also dependent on China: US industry is dependent on Chinese raw materials and components, from rare earths for car batteries to photovoltaic cells for solar modules. Biden’s government wants to present a detailed strategy for China this summer.

The White House wants to reduce its dependence on Chinese imports. To this end, the Biden government recently had the supply chains of hundreds of critical products examined, including batteries for electric cars, pharmaceuticals, rare earths, semiconductors, cell phones, military equipment and other goods.

During his trip to Europe, too, Biden recently pushed for a united front against China. However, some European countries, especially Germany, are concerned that too much demarcation could jeopardize trade and investment with Beijing. The EU must take into account “economic interests” in relation to China, said the EU ambassador to the USA, Stavros Lambrinidis, recently.

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