Category Archives: Markets

China Continues To Welcome Foreign Capital But On Beijing’s Terms

THE DETAILS OF China’s well-signalled coming restrictions on overseas listings by its start-ups are slowly becoming clearer.

A consultation paper issued on December 24 by the China Securities and Regulatory Commission lays out a regime that would require any company wanting to sell shares abroad to register with it. The commission would review the listing plans and coordinate with other relevant agencies.

Authorities would have the power to block any overseas listing they considered a threat to national security, which would encompass compliance with the country’s new data protection regime.

The new rules fall short of a blanket ban on overseas initial public offerings (IPOs), which some had feared. However, they would give authorities blanket veto power over any proposed IPO or secondary listing considered undesirable. Chinese firms will be free to continue to take foreign capital where it is supportive of, or at the least, does not conflict with China’s national goals.

More surprisingly, perhaps, the new regime would not kill off variable interest entities (VIEs), the governance structure often adopted by Chinese companies to get around strict restrictions on Chinese companies taking foreign investment. While VIEs have long existed in legal limbo, they will be allowed to register with the securities regulator providing they are legally compliant.

The legal compliance could well refer to not falling afoul of a blacklist that comes into effect on January 1 of sensitive sectors that would be off-limits to foreign investors.

The regulatory uncertainty has already had a chilling effect on overseas listings, especially since ride-hailing app company Didi Chuxing incurred the wrath of regulators when it pushed ahead with its $4.4 billion IPO in New York in June.

Authorities were cracking down on the tech sector, and Didi’s blanking of their advice to pull the listing led to a series of retaliatory measures and, earlier this month, an announcement that it would delist from New York and switch to a Hong Kong share listing.

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VIEs’ Grey Zone Darkens

VARIABLE INTEREST ENTITIES (VIEs) have always existed in a grey area between legal and illegal.

It has been a happy ambiguity for Chinese companies wanting to skirt the restrictions on foreign ownership and for authorities when they wanted Chinese companies to acquire foreign capital and access to foreign, particularly US technology.

Now priorities have changed. Decoupling from foreign capital markets is the order of the day and the sensitivity that foreign ownership could result in the disclosure or compromise of mass Chinese user data has become acute, perhaps on it-takes-one-to-know one grounds. Thus new rules are being prepared to control tightly which companies can use the VIE governance structure to list on overseas markets and thus end up with foreign shareholders.

While that has been known for some months, the new information emerging is that the mechanism will be a blacklist, which can be played administratively like a concertina. As we noted earlier, the restrictions are likely to vary in intensity by sector. VIEs will be out of reach for any startup that collects data, which means all of them. A national security provision will provide a catch-all for regulators.

Given the political and economic incentives available to force domestic technology firms to list within Beijing’s jurisdiction (including Hong Kong), if there is any surprise, it is that authorities feel the need to take coercive powers. The slights and rebuffs they received earlier touched a nerve.

Existing VIEs will likely be left untouched, if not alone. Tech giants like Alibaba and Tencent that used them but are being reined in by other means.

Nor will VIEs move out of their grey zone status by being banned. They will remain an option for Chinese companies wanting to raise foreign capital where and when that is deemed in China’s national interests.

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Chastened Didi Chuxing Will Head To Hong Kong

Didi Chuxing logo

RIDE-HAILING APP Didi Chuxing incurred the wrath of regulators when it pushed ahead with its $4.4 billion initial public offering (IPO) in New York in June in the face of their advice not to, even as others fell into line as China prepared to crack down on its tech companies.

A series of retaliatory measures rapidly followed, including online app stores being ordered not to offer Didi’s app because it violated regulations on collecting user data and the company being banned from signing up new users. The Cyberspace Administration of China (CAC) launched an investigation of the firm on the grounds of national security and public interest.

Now the company has announced, abruptly, that it will delist its Didi Global American Depositary Receipts (ADRs) from the New York Stock Exchange and switch to a Hong Kong share listing. Existing shareholders will be able to convert their ADRs into freely tradeable shares on the new bourse. This implies the Hong Kong listing will come before the New York delisting is finalised, probably sometime between spring and summer next year.

Japan’s SoftBank is Didi’s largest shareholder with a stake of some 20%. Tencent and US venture capitalists Sequoia also have significant holdings. All will be covered by the six-month lock-up following the IPO, which will end at the end of December. Big shareholders may well consider the financial hit they will take on their holdings to be worth it if delisting draws a line under Didi’s punishment by authorities.

The lock-up will also cover company executives who face significant losses on their holdings. Didi’s shares have fallen 40% since their listing as the measures taken against them, which also included new protections for the millions of ride-hailing drivers, took their financial toll. The company also abandoned plans to expand in the EU and the United Kingdom.

The Didi IPO was the biggest by a Chinese company since Alibaba in 2014, but there has been growing pressure from the United States to deny Chinese firms access to US capital markets.

On Thursday, the US Securities and Exchange Commission said it had finalised rules under legislation the US Congress passed last year that put US-listed foreign companies at risk of delisting if their auditors do not comply with requests for information from US regulators.

Driving capital market decoupling from the other end, Chinese regulators need to approve any plans by a Chinese company to list overseas and are making the approval process more stringent. Particular scrutiny is being applied to any company that holds data that Beijing deems sensitive.

Regulators also intend to close the loophole through which Chinese tech companies can go public on foreign stock markets via variable interest entities (VIEs). That was the governance structure that Didi Global used. VIEs are unlikely to be banned outright, but will get sector-specific new rules for when and how they can be used.

Even without those new rules, Didi’s complete climbdown will have a chilling effect on any other Chinese tech company still harbouring thoughts of a New York listing — if there is one.


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Evergrande Worries The US Fed After All

THE US FEDERAL RESERVE’S latest semi-annual financial stability report comes with an uncommon warning about China’s financial stresses, not the sort of thing it typically comments on.

Its concern is that the stresses in China’s real estate sector could strain the Chinese financial system, with possible spillovers to the United States:

In China, business and local government debt remain large; the financial sector’s leverage is high, especially at small and medium-sized banks; and real estate valuations are stretched. In this environment, the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group. Stresses could, in turn, propagate to the Chinese financial system through spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite. Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.

Was it just two months ago that Fed Chair Jerome Powell said that the risks from Evergrande’s troubles seemed very particular to China?

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Evergrande’s Two Aspirin Help For Now

FOR A COMPANY whose $300 billion of debt sent shivers through investors around the world, sketchy news that it has resolved a $36 million interest payment that was due on Monday seems more a palliative than the curative medicine investors are taking it to be.

Even though it is the equivalent of a doctor telling a patient to take two aspirins for a broken leg and see how they feel in the morning, the announcement by Hengda Real Estate, the main property unit of the world’s most indebted if no long largest real estate developer, Evergrande, that it reached an unspecified agreement with holders of one of its onshore bonds appears to have eased the pain in the financial markets.

International investors have now returned to worrying about something they at least think they understand how to worry about, inflation and stimulus unwinding. Evergrande’s financial accounting is more opaque than even central bank monetary policy.

However, the announcement said nothing about the little matter of an offshore bond on which an $84 million coupon payment falls due on Thursday, although it has a 30-day grace period.

On Monday, Evergrande reportedly missed interest payments to at least two of its biggest lenders. Authorities remain concerned about the systemic financial risk that Evergrande’s sprawling debt obligations pose if there is a disorderly collapse of the group.

They also worry about the potential spillover into the real economy, which risks social instability and thus is a political matter. The group owes $147 billion to unsecured trade creditors such as suppliers, while some 1.5 million disgruntled buyers of Evergrande homes off plan who now face losing their deposits will, at the very least, vent to let off steam, even if more serious protest will be contained.

One reason that the amount owed to trade creditors is so eye-popping is that Evergrande systematically deferred payments to its suppliers so it could cut its interest-bearing liabilities, which it succeeded in doing, reducing them by some 145 billion yuan ($22.4 billion) to 571.7 billion yuan as of end-2020..

For now, the ‘d’ word has been avoided — and authorities have the administrative tools to ensure it stays that way. That will dull the pain and provide temporary relief, if not a cure.

Update: Regulators have reportedly instructed Evergrande to focus on completing unfinished properties or repaying deposits while avoiding a near-term default on its dollar-denominated bonds. Beijing is also said to have told local officials and state-owned enterprises to step in with bail-outs only as a last resort in the even of a disorderly collapse of the property developer.

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Beijing Reportedly Tightening Up On Tech Company Foreign IPOs

CHINA’S SECURITIES REGULATORS indicated last month that stricter supervision of all firms listed offshore was coming. Reports now say this sweeping intent is being narrowed to a ban on foreign listings by platform technology companies whose data poses potential security risks. Any proposed foreign listing would have to pass Cybersecurity Administration of China review.

In recent months, Beijing has tightened its grip on the platform companies. Particular attention is being paid to unfair competition and the companies’ handling of the enormous troves of consumer data they collect. Foreign initial public offerings have been part of that, but have become more politically sensitive after Didi Global, parent of ride-hailing app Didi Chuxing, ignored the authorities’ request to pull its share offering in New York.

The new rules to limit foreign listings are also reported to include a tightening up on variable interest entities (VIEs), a legally ambiguous corporate governance structure used by technology companies to raise capital overseas as it gets around Beijing’s restrictions on foreign investment in sensitive industries such as media and telecommunications. The changes could include greater shareholding disclosure and bringing VIEs, generally incorporated in tax havens, under direct legal jurisdiction.

One intent behind the change may be to drive tech companies back to domestic markets on the mainland or Hong Kong for their listings. After the halting of Ant Group‘s $37 billion share flotation last year and subsequent regulatory tightening over domestic new listings, scores of tech companies seeking outside capital dropped plans to list on Shanghai’s STAR Market and Shenzhen’s ChiNext market and rushed to list overseas, particularly in New York.

More broadly, the new rules, if they come to pass as advertised, will be in line with Beijing’s national security concerns, imagined or not, that foreign ownership could result in the disclosure or compromise of mass Chinese user data.

They will also align with the leadership’s growing intent to ensure that business supports China’s national interests as the Party defines them. Keeping the wealth created by the country’s burgeoning technology sector at home to fund more indigenous development in the sector is one of them.


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ByteDance IPO Reportedly Moves Ahead

BYTEDANCE, OWNER OF short video sharing app TikTok, looks set to be rewarded for toeing the Party line amidst the crackdown on tech.

The Financial Times reports that the company is likely to be allowed to go ahead with an initial public offering (IPO) of its shares in Hong Kong later this year or early next.

ByteDance had planned to go public in New York earlier this year but put those plans on hold when told by Chinese regulators to address data security concerns.

It has since been going through the review process and has submitted filings to authorities, the Financial Times reports. ByteDance is hoping that it will get clearance to proceed next month.

It has also denied that the Financial Times report, but with the sort of non-denial denial that suggests that it would not be politically expedient to do anything else.

Last month, Beijing indicated it would require a cybersecurity review of nearly all companies looking to list their share abroad.

Overseas listings have been frozen in effect to safeguard data security in the wake of ride-hailing app Didi Global’s controversial $4.4 billion IPO in New York that the company pushed forward in the face of official objections.

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China’s Securities Regulators Say Sky Is Not Falling, Honest

AUTHORITIES MAY HAVE had specific reasons for their unexpected assault on the e-tutoring industry a week ago. Still, they were not necessarily distinct enough to the eyes of investors to prevent a broad sell-off in Chinese tech stocks and, on international exchanges, Chinese companies listed in general.

It looked like another front in the expanding crackdown on the technology sector to ensure its entrepreneurs were aligned with the Party’s development agenda. In addition, the reasoning went, if authorities could ban private companies from making profits and going public in one industry, they could potentially do the same in any industry.

Regulators and other financial officials have now undertaken a damage limitation exercise, suggesting that the estimated $800 billion of market value wiped out in recent days was an unintended consequence or at least a more severe and broad reaction than had been expected.

China Securities Regulatory Commission (CSRC) Vice Chairman Fang Xinghai has held a hastily convened call with leading investment banks, including foreign ones, to ease market fears. The message was that last week’s actions were particular to e-tutoring companies and narrow, to protect online data security and social welfare, not to close them down unilaterally.

Meanwhile, state media is suggesting the stock market sell-off has been overdone. In addition, they are highlighting comments by CSRC Chairman Yi Huiman, albeit made at the Lujiazui Forum seven weeks ago, that the regulator is generally supportive of companies that seek foreign listings. State media is also trying to allay fears that variable interest entity structures will be banned and that Chinese companies will not be allowed to list in the United States.

How reassuring to investors this charm offensive — and some suspected buying up of shares by state-linked investment funds to prop up prices — will prove is an open question.

The Fifth Plenum, the Central Economic Work Conference and the Ninth Meeting of the Central Finance and Economics Committee emphasised the necessity of strengthening anti-monopoly measures and preventing the disorderly expansion of capital. That policy direction is set from on high, as is the intent to reform the governance of the platform tech companies to make them internationally competitive as part of Beijing’s development priorities.

That implies that, regardless of whether you call it a crackdown or the strengthening of regulation and supervision to ensure the development of the platform economy is on a sound and orderly track, the technology sector will continue to be in authorities’ crosshairs.

Investors should be under no illusions about the Party’s commitment to its overall political, social and economic agenda and to redirecting the tech sector to serve China’s national interest as it sees it.

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China’s Polluters Will Have To Pay A Price

A coal-fired power plant in Shuozhou, Shanxi province, China. Licensed under the Creative Commons Attribution 3.0 Unported license. Photo credit: Kleinolive.

CHINA IS NO climate denier, although the connections between climate change and the Henan flooding have been only lightly made in state media. However, reaching peak carbon before 2030 and going carbon neutral by 2060 have been policy since last year and are incorporated into the 14th Five Year Plan (2021-25). 

Specifics are sketchy beyond a 13.5% reduction in energy consumption per unit of GDP, an 18% reduction of carbon dioxide emissions per unit of GDP and an increase in the share of non-fossil-fuel energy in total energy consumption to around 20% from 15.8% over the life of the plan. The country’s new carbon trading market will have to play a significant role if those targets are to be achieved.

The long gestated national market finally launched on July 16 on the Shanghai Environment and Energy Exchange, becoming the world’s largest trading scheme for greenhouse gas emissions from the getgo.

Progress will likely be cautious. For now, only some 2,225 firms in the thermal power generation sector can participate. They emit more than 4 billion tonnes of greenhouse gases a year, contributing about 40% of China’s total carbon dioxide emissions and 15% of the world’s total. 

Other emissions-intensive sectors such, steel, cement and civil aviation are expected to join the market later. 

The initial round of carbon permits was allocated for free. The price per tonne of carbon dioxide equivalent was 48 yuan ($7.42) when the market opened. The first bulk deal — Sinopec’s agreement on July 21 to buy 100,000 tonnes of carbon quota from China Resources Group — was priced at 52.92 yuan per tonne.

By way of comparison, the price in the EU’s emissions trading scheme is around 60 euros ($70.80). 

However, China’s power generation industry is far from being a market-driven world and not well placed to shoulder the added cost of carbon. The lack of market-priced electricity — local and regional governments set prices — means there is no way for power generators to raise prices and induce lower and more efficient energy consumption by consumers. 

In the meantime, the price of coal is no longer regulated, leaving the power generators squeezed. The hope is that this will make them jettison their most outdated and inefficient power generation plants — and turn to renewable sources of energy.

The Shanghai price will inevitably rise as the government expands the number of participants, begins auctioning permits and reducing their supply. At present, there is effectively no cap on carbon credits. It will not be until then that market will significantly affect China’s capacity to meet its goal of net-zero carbon emissions by 2060.

China will probably reach peak carbon sometime this decade, come what may, as the industrial structure of the economy changes, although quite when will depend on a mix of the economic growth rate and the vigour with which authorities pursue policy enforcement of emissions reduction.

If anything, early recovery from the pandemic last year put the country on the back foot in pursuit of its goal. Energy consumption and emissions rose in China in 2020, whereas they declined almost everywhere else.

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China-US Decoupling Changes Its Terms Of Engagement

KEEP, CHINA’S MOST popular fitness app, and medical data group LinkDoc Technology pulled plans for initial public offerings (IPO) on the New York Stock Exchange in advance of last weekend’s crackdown on four other sector-leading app platforms, it has now emerged.

Didi Chuxing (ride-hailing), Huochebang and Yunmanman (commercial vehicles), and Zhipin (recruitment) were all put under investigation by the Cyberspace Administration of China, shortly after launching IPOs in New York, for failing to protect the data privacy of Chinese citizens, as foreign investors would have access to it through their share ownership, thus creating a national security risk.

Didi Chuxing reportedly ignored a warning from authorities to ‘delay’ its $4.4 billion IPO. As Jack Ma’s Ant Group can attest, there are some tigers it is rarely wise to poke in the eye.

In the meantime, authorities are preparing to end the governance structure that allows them to do so, variable interest entities (VIEs). VIEs were created to get around the restriction on foreign ownership of Chinese tech companies that hamper Chinese companies from raising foreign capital but exist in that peculiarly Chinese governance grey area between allowed and forbidden.

The China Securities Regulatory Commission’s (CSRC) is setting up a team that will review any proposed overseas IPO, which will now also require the approval of the relevant ministry. It will be paying particular attention to any Chinese company using a VIE structure.

This will lead to fewer and probably no listings of Chinese companies in New York and more in Hong Kong, where Beijing’s view of sovereignty-based digital governance is more easily enforced.

It appears we have reached a point of asymmetric decoupling of equity markets. In the United States, the Trump administration launched a policy of denying Chinese firms access to US stock exchanges to prevent Chinese access to US technology and capital, leading to the unedifying flip-flop by the New York Stock Exchange over delisting the three leading Chinese telcos. China is now responding by denying US investors access to Chinese data and forcing US capital that wants to invest in Chinese companies to move offshore to Hong Kong.

This would provide the decoupling the previous US administration wanted, and which the current one has shown no signs of reversing, but on China’s terms, which would not have been the original intention.

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