Chinese companies started to list overseas in 1993 when the domestic capital market just got going and the threshold for issuers was rather high, including restrictions on foreign investment. In June 1993, Qingdao Beer went public in Hong Kong, the first company from the Chinese mainland to list beyond the border. In 1994, Huaneng Power International was the first Chinese company to go public in the US.
Overseas listing helps companies expand fundraising sources and use international capital to engage in global cooperation. Meanwhile, it helps improve the quality of listed companies at home. The domestic market learns from advanced systems abroad and pushes domestic-listed companies to do better in terms of disclosure, accounting and corporate governance.
When there was no base for fostering technology start-ups in the early stages of the domestic capital market in the 1990s, the multi-tier capital market abroad had built a mutual-promotion virtuous cycle with the real economy and technology development. Going public abroad provided the foundation for a large number of Chinese internet tech companies to grow. Consumer-internet and information technology firms account for two-thirds of Chinese stocks traded abroad (in market value) and the top three are internet firms boasting market values in the hundreds of billions of US dollars.
Now Chinese stocks play an important part in pushing two-way opening-up of the capital market. Chinese stocks have become a prime choice for global investors in allocating Chinese assets. The majority are traded in the US. According to Wind Financial Terminal, a Shanghai-based financial information provider, the market value of 285 US-listed Chinese stocks totaled US$1.8 trillion by the end of July, accounting for more than 3 percent of the overall stock market in the US. This year, the number of companies seeking listing in the US has rebounded after the blows from Sino-US friction and the coronavirus pandemic in 2020. Between January and July, 38 companies listed in the US, exceeding the total in 2020.
But the environment for Chinese stocks has changed a lot. The Trump administration’s anti-globalization crusade has led to trade friction, the curbing of China in terms of technology and finance, and also measures that attempted to prevent US investment from flowing to China. In September 2019, reports that the White House was considering limits on US investment in China resulted in slumps in Chinese stocks. In November 2020, former US president Donald Trump banned Americans from investing in Chinese companies they claimed had military links. The S&P Dow Jones Indices thus removed some Chinese companies from its index products. A month later, Trump signed the HFCA (Holding Foreign Companies Accountable) Act into law, which is aimed at removing Chinese companies that fail to comply with US auditing standards from US exchanges.
The Biden administration continued the toughness. It barred US investors from investing in even more Chinese companies in June. Several global index publishers said they would remove a number of Chinese companies from equity indexes. On July 30, the US Securities and Exchange Commission (SEC) said in a statement it will demand additional information disclosure from Chinese companies that seek to list in the US, including stating possible risks from oversight of the Chinese government. Chinese stocks listed in the US might face more regulatory pressure in the future.
At home, China is tightening supervision of overseas-listed Chinese companies, but with a different purpose from the US government that increasingly uses financial regulation as a political tool. China is more pragmatic and deals with concrete issues in pushing cooperation in supervision, realizing that the differences in laws and phases of the capital market in the two countries are standing in the way of regulating listed companies. As China is pushing liberalization of capital flows in and out of the country, the two countries’ capital markets will be more tightly linked and more and more companies, investors and financial institutions will participate in each other’s markets, so enhancing cooperation in supervision is inevitable.
At present, Chinese H-shares that are directly issued in the Hong Kong Stock Exchange by companies registered in the mainland are within regulatory scope. But companies that use a contract control or VIE (variable interest entities) structure, a common method among Chinese companies to get listed abroad that involves using an overseas registered shell company to control a company that actually operates within China’s borders, are not subject to substantive domestic regulation. China’s new securities law that came into effect in March 2020 stipulates that China-based companies that issue securities overseas or trade securities overseas should comply with provisions of the State Council, though which department will supervise overseas-listed Chinese stocks is yet to be clarified.
China aims to prevent risks and promote safety and development by strengthening supervision of overseas listings. In July, Chinese authorities released a document about tightening the crackdown on illegal activities in the securities market. The document said China will adopt solid measures to cope with risks and emergencies involving Chinese companies listed abroad and promote the building of a supervision system. It also mentioned improving laws and regulations on cross-border data security and classified information management.
On July 30, the Central Political Bureau of the Communist Party of China (CPC) called, for the first time, to improve the regulatory system for companies listed abroad. For China, the move is a response to internal and external changes. On the one hand, overseas-listed internet platforms need to be better regulated in China’s efforts to fight against monopolies, promote fair competition and prevent unregulated expansion of capital. On the other, frictions with the US in economic and financial areas are placing overseas-listed Chinese stocks in an increasingly rigorous regulatory situation, which makes it necessary to plan ahead to prevent financial risks that might be caused by forced delisting of Chinese companies.