China expresses support for IPOs. Investors look at the speed of approval

BEIJING – Chinese authorities this week announced a new policy to support venture capital, raising hopes of faster approval of IPOs 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 increased regulatory scrutiny.

In one of the latest efforts to support the industry, China’s top executive body, the State Council, published late Wednesday high-level measures for “promoting the high-quality venture capital development.”

“Everything will depend on the implementation rules,” said Marcia Ellis, global co-chair of the private equity practice at Morrison Foerster.

“It is positive that the government at central level has realized there is a problem,” Ellis said. “At least with regard to technology investment, venture capital can be a positive force in the Chinese market, which frankly can help China compete with the US in the technology race.”

In terms of actions to watch, Ellis said that “what we’re really looking for when it comes to IPOs is for approvals to happen at a faster pace.”

“Venture capital investors are not going to make investments unless they see a reasonably clear path to an exit,” she said, noting that this has not been the case over the past year.

The new policy included a section on expanding exit channels for venture capital, with an emphasis on supporting companies with technological breakthroughs. The measures also called for implementing a foreign listing management system and relaxing exit channels for non-yuan venture capital funds.

“The real sticking point for foreign listings is the overseas IPO process and currency regulations,” said Winston Ma, an adjunct professor at NYU School of Law.

The pace of both domestic and foreign public offerings has slowed. Investors, especially those pouring US dollars into Chinese venture capital funds, have favored US IPOs as the largest and most liquid market.

Looking ahead, “the market is keeping an eye on the speed of U.S. IPO approvals,” Ming Liao, founder of Prospect Avenue Capital, said in Chinese, translated by CNBC.

Chinese authorities have tightened their oversight and introduced new rules for foreign IPOs after taxi company Didi pushed ahead with a U.S. listing in 2021 despite reportedly being under government investigation. In addition, the US has tightened its supervision of American capital going to China, especially in the military field.

Previously, the lack of regulation also resulted in a number of high-profile fraud cases involving China-based IPOs in the US

Morrison Foerster’s Ellis warned how the new policy encouraged companies and research institutions in general to participate in venture capital.

“Unfortunately, I think if companies that are not professional investors start doing this and they do this because they are encouraged by the government, it can only be more damaging to the market in the long run because they are going to lose money and things are going to go wrong. to tarnish the venture capital market in China,” Ellis said. “You need professionals to do this.”

The China Securities Regulatory Commission has increased fines for misleading investors and clarified requirements for foreign IPOs. Last year, it announced updated rules, effective March 31, 2023, that require domestic companies to comply with national security measures and the Personal Data Protection Act before going public abroad.

Since, 73 companies are listed in the US and 85 in Hong Kong, Fang Xinghai, vice chairman of the commission, said at a conference on Wednesday, according to state media.

The IPO processing speed has not been fast enough and will be accelerated, Fang said in the report, adding that the committee supports mainland Chinese companies to go public abroad, especially 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 a London listing amid regulatory scrutiny.

China has also tried to develop its domestic stock markets, which are only about 30 years old.

Morgan Stanley equity analysts noted separate comments on Wednesday 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 think this implies that capital markets could welcome more diverse IPO candidates as long as they can demonstrate innovation and drive productivity growth, although IPO volume could remain low in the near term as higher standards also apply” , the Morgan Stanley report said.

Wu took over as CSRC head in February following a volatile downturn in the mainland stock markets. Markets have since recovered losses for the year to date.

The new policy also called for supporting international investment institutions in setting up yuan-denominated funds.

“If foreign funds could more easily set up RMB funds, then there is money willing 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 feel that in China they can actually raise money for Chinese investments, while now it is very difficult to attract USD from the US and possibly Europe for China-focused funds. ”