How The US And China Tug Of War Is Interrupting The IPO Surge

Summary

• In H1 of 2021, five of the top 10 IPOs based on funds raised are for Chinese companies.
• The number of IPOs launched globally at the start of 2021 have raised a massive $160 billion.
• It’s estimated that upwards of $12.1 billion was raised by Chinese companies through IPOs.

The global IPO market is soaring. The volume of initial public offerings and the proceeds they’ve raised has accelerated to record-breaking levels in 2021, but the boom period may be under threat from the intensifying US and China trade war - which has already prompted a crackdown on Chinese companies listing in the US.

The 2021 initial public offering market has been punctuated by large volumes of Chinese firms going public, with domestic regulations leading to many companies opting for overseas listings.

(Image: Fortune)

In H1 of 2021, we can see that five of the top 10 IPOs based on funds raised are for Chinese companies listing either domestically on the Shanghai Stock Exchange or overseas on the Hong Kong Exchanges and Clearing.

Topping the list by some margin is Kuaishou Technology, which raised $6.2 billion after opting to list in Hong Kong.

(Image: Seeking Alpha)

As the chart above shows, the number of IPOs launched globally at the start of 2021 have raised a massive $160 billion - driving initial public offering hysteria to a level that resembles the dotcom boom at the turn of the century.

However, the trade war between the US and China may threaten the pace in which companies are coming to market after a series of sanctions, tightening regulations and a notable casualty in the US-listed Chinese ride-hailing firm DiDi.

Making an Example of DiDi

Despite growing tensions between the US and China, the number of Chinese companies listing on American exchanges climbed to a 10-year high in 2020.

Although Washington has previously threatened to delist companies that don’t meet American accounting standards, a total of 32 China-based firms opted to go public for the first time in the US - according to a University of Florida study.

It’s estimated that upwards of $12.1 billion was raised by Chinese companies through IPOs, amounting to the highest amount since Alibaba set the largest IPO record in its New York Stock Exchange debut.

"In spite of the talk, including congressional action about delisting Chinese companies, Chinese companies continue to go public in the United States,” Jay Ritter, a finance professor at the University of Florida and author of the report, told VOA. “The last year was pretty active and this year continues to be the case as well."

The US has become an increasingly favourable location for flotations, with government stimulation packages handed out in the wake of the Covid-19 pandemic being largely used by retail investors to invest in stocks and shares.

“People in the US traded about 90% more stocks than the week before they received their stimulation funds,” explained Maxim Manturov, Freedom Finance Europe’s head of investment research. “Goldman Sachs recently raised its expectations for stock demand by retail investors in 2021, from $100B to $350B.”

However, we’re now seeing China’s response to the emerging trend of companies opting for Wall Street ahead of Shanghai. The recent US listing of Chinese ride-hailing company DiDi was met almost instantly by the government pulling its app from China’s app stores - making it impossible for new customers to sign up to the service in the short term.

This move caused DiDi’s shares to drop 20%, with Beijing cybersecurity watch dogs claiming that the app was illegally collecting the personal data of users. However, it’s likely that the ban was also political in nature, with the Chinese Communist Party ramping up their efforts in targeting China-based issuers of American Depositary Receipts like DiDi.

DiDi, like many other companies, incorporated in the Cayman Islands as a means of bypassing China’s laws over the raising of foreign capital.

The move has also led to DiDi facing lawsuits as US investors seek retribution for the company’s floundering stocks in the wake of the crackdown.

Stifling Domestic IPOs

Companies like DiDi are risking backlash in listing overseas because of the tighter rules that China has been introducing for listings on Shanghai’s Nasdaq-style STAR board that requires firms to prove their technology credentials in a more stringent listing process before going public.

“China has tightened its technology regulatory regime in recent months. For example, it was decided to tighten the rules for conducting IPOs abroad for technology companies that store data on more than one million users. They must now obtain approval from the authorities to be placed in other countries due to the risk that such data and personal information can be affected, controlled, and misused by foreign governments. In addition, in June 2021, the Chinese government passed a new law (data security; governs data collection and storage), which will take effect in September; work is also continuing on a new draft law on personal data protection.” says Maxim Manturov.

Although the tighter rules aren’t intended as a clampdown on any specific sector, they would make it significantly harder for financial technology firms - as we saw in the case of Ant Group, which had its IPO pulled under intense regulatory scrutiny.

Authorities in China are aiming to clamp down on the many sub-standard firms domestically that have rushed to raise funds to take advantage of lower levels of oversight and higher valuations amidst the IPO boom. Many companies are looking to cash in on investor appetite for technology listings.

However, regulators' bids to reign in Chinese tech firms have left companies struggling to plan out their next moves. Between the scrutiny of Shanghai IPO listings and the risk of backlash in seeking a US debut, Chinese firms may struggle to continue their vital role as a driving force in the current IPO surge.