Analysis-Bureaucracy obstructs China's overseas IPO process even as markets recover By Reuters

By Kane Wu, Julie Zhu, Selena Li and Scott Murdoch

HONG KONG (Reuters) – More than a year after China pledged to ease the overseas listing process, companies are reeling from a regulatory logjam that is unlikely to ease anytime soon, and eyeing prospects for sharply higher valuations. declines even as market confidence improves.

Hopes for a revival in overseas listings were fueled by Beijing's promise in April to facilitate IPOs in Hong Kong and Zeekr's strong debut in New York last month. China has clamped down on overseas capital raisings since 2021.

A 6.1% year-to-date jump through Friday, after falling as much as 18% last year, was also expected to offer a window of opportunity for IPO participants.

But bankers, executives at Chinese companies and their investors said they expect the overseas IPO drought to continue this year, weighing on companies' ability to raise capital in a slowing economy.

Overseas listings are critical fundraising channels for Chinese companies. These deals also account for the majority of the revenue that global investment banks earn in Asia.

The lack of such deals, as a result of China's regulatory crackdown as well as volatile capital markets and geopolitical tensions in recent years, has resulted in bank layoffs and hit private equity fund returns.

At least $20 billion in IPO proposals by Chinese companies in Hong Kong have been awaiting approval for months, according to Reuters estimates. Bankers close to those deals say most of the big deals are unlikely to hit the market anytime soon.

Home appliance maker Midea has been asked about how a planned Hong Kong listing of more than $2 billion could affect the value of its Shenzhen-listed shares, Reuters reported on Wednesday.

Although monthly approval, on average, rose to about 13 IPOs in the first five months of this year, up from 9 in nine months last year after the new rules were introduced, none of them are expected to raise more than 500 millions of dollars.

The China Securities Regulatory Commission (CRVS), which last March unveiled rules to strengthen supervision of overseas listings, had approved only one initial public offering (IPO) as of May 24. The regulator's website showed on Friday that it had approved seven more submissions.

In response to Reuters' request for comment sent last Thursday, the CSRC said it had always supported domestic companies to legally tap both domestic and foreign markets for financing and development purposes.

However, a Hong Kong-based banker, who did not want to be identified due to the sensitivity of the matter, said it sometimes takes months from IPO filing to regulatory approval.

The obstacles are mainly due to interdepartmental control, the list's advisers said.

Chinese companies with the so-called variable interest entity (VIE) structure, common for companies with foreign investors, must obtain approval from their respective primary industry regulators under the new filing regime.

But the CSRC does not have authority over other government and communist party bodies, such as the cyberspace authority, which has caused delays and uncertainty for companies, advisers said.

Since the implementation of overseas listing rules, the CSRC has “actively and orderly” processed IPO applications, and the number of companies that have completed filing has increased every month, the regulator said.

APPROVAL PROCESS

The CSRC approval, known as completion of IPO filings, is the regulatory go-ahead a company needs before launching an IPO, a process that ended years of a laissez-faire approach to fundraising in the foreign.

On average, the approval process has delayed an offshore offering by two to three months, with the time needed for all regulatory clearances amounting to at least eight to nine months, said a senior banker at a foreign bank.

Chinese companies raised $1.5 billion in overseas IPOs through May 17, down 21% from a year earlier, LSEG data showed, well below the record $27 billion set in 2021.

The CSRC said it would continue to “optimize the supervision mechanism of overseas listing submission” and that “more companies will successfully complete the submission of applications in the near future.”

The lengthy regulatory process comes on top of China's slowdown and the real estate crisis, which have made both issuers and investors cautious about stock offerings and company valuations.

JD (NASDAQ Industrials, a company structured by VIE, whose Hong Kong listing application was filed more than a year ago, is still awaiting approval pending supplemental materials, a regulatory disclosure shows.

Its parent company, JD.COM, has delisted another unit, JD Property, after the latest filing on the Hong Kong stock exchange expired, two sources with knowledge of the matter said.

JD Property did not obtain clearance from the CSRC, they said, although it was unclear whether regulatory hurdles were the reason for the withdrawal.

JD.com, the parent company of JD Industrial and JD Property, did not respond to Reuters' request for comment.

Some IPO hopefuls fear they will have to list at lower valuations if demand wanes when approval is granted, said a banker and a senior executive at a potential listing candidate.

Others accepted the slow pace of approvals and did not try to pressure regulators, they added.

“In the past, it was common for regulators to quietly defend companies seeking to list overseas. Now the political incentives have completely changed,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.

“There is a big risk of downside to backing a foreign listing, and not many upsides.”