(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

HONG KONG  - Beijing's market watchdogs have given with one hand and taken with the other. New draft regulations by the China Securities Regulatory Commission published on Christmas Eve expressed cautious official tolerance of Variable Interest Entities, an arrangement employed by companies like Alibaba and Tencent to list abroad, effectively circumventing restrictions on foreign investment in Chinese internet technology firms. On Tuesday, however, the National Development and Reform Commission - the country’s powerful economic planning agency - stuck its oar in, announcing that companies operating in domestic industries where foreign investment is restricted must seek its approval as well before listing abroad. 

The NDRC’s entry, alongside the Ministry of Commerce, adds two more potential vetoes to the offshore approval process after the CSRC and the cybersecurity body, the latter of which recently wrecked the New York initial public offering by ride sharing giant Didi. The CSRC promises it will take no more than 20 days to make a final decision on applications, but the other agencies have made no such public commitments. In addition to access to hard currency outside China’s capital controls, one of the big attractions of an overseas IPO was the speed with which it could be executed. More red tape could significantly reduce that advantage, pushing local companies into the congested queue to either list on domestic exchanges, currently over 700 companies long - or give up entirely.

Another potential complication is the NDRC’s insistence that foreign ownership of equity in overseas-listed Chinese companies from sensitive industries like internet services be restrained at 30%, and no single entity can own over 10%. Technically this language seems to steer around VIEs, legal contracts which entail no equity, but the NDRC also specifies that foreigners cannot participate in management of the company. It also said the new requirements will not apply to those that have already exceeded the foreign ownership cap; it’s unclear who that refers to. Japanese firm Softbank alone holds a 25% stake of Alibaba’s listed offshore entity, while South African investor Prosus maintains a 29% stake in Tencent’s.

For its part, the CSRC statement implied the existing framework applied to new IPOs may eventually be applied to listed ones. Company founders and private equity backers may appreciate the clarity, but the direction of travel looks ominous.

 

CONTEXT NEWS

- China’s National Development and Reform Commission and the Ministry of Commerce said on Dec. 27 that domestic companies from sectors on the “negative list” where foreign investment is restricted need approval to sell shares overseas. They must also abide by a 30% cap on foreign ownership. Foreign investors in such companies would be forbidden from taking part in management, and their shareholding must follow the same requirements as for foreign investors in China’s stock market, the document said.

- The China Securities Regulatory Commission announced on Dec. 24 that it will allow domestic companies to list overseas using the so-called variable interest entity structure so long as they comply with related local laws and regulations.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Pete Sweeney and Thomas Shum) ((For previous columns by the author, Reuters customers can click on CHEN/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | yawen.chen@thomsonreuters.com; Reuters Messaging: yawen.chen.thomsonreuters.com@reuters.net))