A man walks his dog in the shade from the midday sun past the New York Stock Exchange (NYSE) building in Manhattan during hot weather in New York City, New York, USA, August 11, 2020.
Mike Seegar | Reuters
BEIJING — Chinese authorities this week announced a new policy to support venture capital, raising hopes of faster approval of initial public offerings in the near future.
China’s once-booming investment capital and startup ecosystem has slowed sharply over the past three years amid increased regulatory scrutiny.
In one of the latest efforts to support the industry, China’s top executive body, the State Council, released high level measures for “propaganda” quality development of venture capital“
“Everything will depend on the implementation rules,” said Marcia Ellis, global co-chair of the private equity practice at Morrison Foerster.
“It’s positive that government at central level has recognized there is a problem,” Ellis said. “At least when it comes to technology investing, venture capital can be a positive force in the Chinese market that, frankly, can help China compete with the US in the technology race.”
In terms of actions to watch, Ellis said that “actually on the IPO side, we expect approvals to start coming in at a faster pace.”
“Venture investors are not going to make an investment until they see a fairly clear path to exit,” she said, noting that this has not been the case for the past year or so.
The new policy included a section on expanding venture capital exit channels, with an emphasis on supporting companies that have achieved technological breakthroughs. The measures also include introducing an overseas listing management system and simplifying exit channels for non-renminbi-denominated venture capital funds.
“The real bottleneck for overseas listings is the overseas IPO process and foreign exchange rules,” said Winston Ma, an associate professor at New York University School of Law.
The pace of public offerings both onshore and overseas has slowed. Investors, especially those investing US dollars in Chinese venture capital funds, prefer IPOs in the US as the largest and most liquid market.
Looking ahead, “the market is watching the speed of IPO approvals in the U.S.,” Ming Liao, founding partner of Prospect Avenue Capital, said in Chinese, translated by CNBC.
Problems of foreign IPO
Chinese authorities have tightened controls and introduced new rules for overseas IPOs after ride-hailing company Didi listed in the US in 2021 despite reportedly being under government investigation. In addition, the United States has tightened controls on American capital flowing into China, especially into military-related businesses.
Previous lack of regulation has also led to a number of high-profile cases of fraud involving Chinese IPOs in the US.
Morrison Foerster’s Ellis warned that the new policy encourages businesses and research institutions to participate widely in venture capital.
“Unfortunately, I think that if companies that are not professional investors start doing this, and are doing it because they are being encouraged by the government, it could cause even more damage to the market in the long run because they will lose money and that will continue”. to taint the venture capital market in China,” Ellis said. “We need professionals for this.”
The China Securities Regulatory Commission has increased penalties for misleading investors and clarified requirements for overseas IPOs. Last year, the company announced updated rules, effective March 31, 2023, requiring domestic companies to comply with national security measures and privacy laws before going public overseas.
Since then, 73 companies registered in the USA and 85 people in Hong Kong, commission vice-chairman Fan Xinghai said at a conference on Wednesday, according to state media.
The speed of IPO processing was not fast enough and will be accelerated, Fan said in the report, adding that the commission is supporting mainland Chinese companies to list shares overseas, especially in Hong Kong.
Fast fashion giant Shein, which has been trying to distance itself from its Chinese roots, has reportedly moved its US listing plans to a London listing amid regulatory scrutiny.
Venture capitalists in China for China
China has also sought to develop its domestic stock markets, which are only about 30 years old.
Morgan Stanley analysts noted separate comments on Wednesday from the head of China’s securities regulator, Wu Qing, that capital markets should increase their targeted support for businesses in line with the country’s efforts to develop new technologies.
“We believe this means capital markets may welcome more diverse IPO candidates if they can demonstrate innovation and drive performance growth, although IPO volume may remain low in the near term given that higher standards are also in place,” Morgan Stanley said in a report.
Wu took over as head of the CSRC in February following a volatile downturn in mainland Chinese stock markets. Markets have since recovered their losses for the year.
The new policy also includes support for international investment institutions to establish RMB-denominated funds.
“If it was easier for foreign funds to set up funds in yuan, then there is money that wants to do it,” Ellis said.
“There are a lot of China-focused funds headquartered in Asia,” she said. “These are US dollar funds, but their management companies also want to manage domestic RMB funds because they feel they can actually raise money in China to invest in China, whereas raising US dollars from the US and maybe Europe for the funds oriented towards China is now very difficult. “