Earlier this year, the Chinese authorities announced new rules for listings by Chinese companies on overseas stock exchanges.
In an article for the Financial Times, Craig Coben reports that “bankers rejoiced” at the thought of a slew of international Chinese IPOs. Fees!
But as so often with China, there’s a catch. The Chinese Security Regulatory Commission (CSRC), China’s SEC, is telling would-be Chinese issuers to cut back on the China risk disclosures listed in offering documents.
China’s new offshore listing rules that came into effect on March 31 forbid any comments in the listing documents that “misrepresent or disparage laws and policies, business environment and judicial situation” of China.
However, the rules do not specify what would qualify as such comments.
All major markets require issuers to disclose to prospective investors risks related to the company itself, its business sector, and the country where it is headquartered in.
The China-specific risk statements in prospectuses prepared after March 31 caught the attention of some senior leaders in Beijing, prompting the CSRC to reiterate its stance on the subject to dealmakers, one of the sources said.
CSRC told law firms at the meeting last week not to sign off any offshore share offering disclosures, which included statements that distorted or derogated China’s laws, policies and regulatory environment, according to the three sources.
Essentially, companies operate in China at the regime’s pleasure, but that, apparently, is not something that the Beijing regime wants to be mentioned too loudly. It has its image to consider, after all.
Meanwhile, for its part, the SEC has given guidance on the sort of disclosures it expects from companies based in (or with a majority of their operations based in) China. These include, Coben explains, “more specific and prominent disclosure about material risks related to the role of the [Chinese] government . . . in the operations of China-based companies.”
Other disclosures, where relevant to a particular company’s business, include disclosures relating to America’s Uyghur Forced Labor Prevention Act.
It seems then that Chinese companies looking to tap the U.S. capital matters (at least directly) may find themselves caught between a rock and a hard place. That’s where they should stay.
The Uyghur issue speaks (or at least I hope it does) for itself. But it is also essential that U.S. investors considering committing capital to Chinese companies are reminded that China’s ruling party (no friend of the U.S. or, for that matter, free markets) is effectively a silent (or not so silent) partner in every Chinese company. For all the economic liberalization introduced by Deng Xiaoping and his successors, China has never come close to becoming a true market economy, and under Xi Jinping it has been shedding those economic freedoms it did have. Xi may have softened some of his language recently as the Chinese economy struggles, but that, at best, is only a tactical retreat, and not one, as the impasse over disclosures shows, that offers any basis for longer-term trust.
The Chinese economy is best described as operating a form of “harnessed capitalism,” a system that is designed to exploit some of the dynamism of capitalism — companies remain privately owned — while ultimately subordinated to the interests of the state. There are many terms to describe this sort of system, but “shareholder friendly” is not one of them.
It’s not only investors in newly listed Chinese companies that should take account of that.