IPO Public Markets

The Market Minute: One Of The Most Active Years For Chinese Listings In The U.S. Is Now On Pause

Illustration of a board game in the style of Chutes & Ladders named The Market Minute.

Chinese companies rushed to go public on the U.S. markets this year, so far making 2021 one of the most active years for listings from China-based startups. 

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But all of that activity is effectively on pause, thanks to a series of reported moves by the Securities and Exchange Commission, and it seems unlikely to pick back up again by the end of the year, according to Matt Kennedy, a senior strategist at IPO research firm Renaissance Capital.

“We thought that Chinese IPOs could have declined because of the law that went into effect at the end of last year,” Kennedy said, referring to a law that allows the Public Accounting Oversight Board to review the auditors of Chinese companies listing in the U.S. “We thought that was a possibility. What ended up happening is we saw a surge of U.S. listings from Chinese issuers trying to raise money in the U.S. market ahead of the rule change. So I guess we knew the end was coming eventually.”

It was surprising that so many Chinese companies decided to push forward and move faster with their plans, when the Chinese government was also trying to dissuade them, Kennedy added.

There have been more Chinese companies doing initial public offerings on the New York Stock Exchange and the Nasdaq in 2021 than any other year in the past decade, according to Crunchbase data. So far this year, 34 companies based in China have had an initial public offering on the Nasdaq and NYSE, surpassing 2018’s record 33 companies.

But crackdowns by the Chinese government, most notably on newly public ride-hailing giant Didi and on the edtech industry, caused SEC chair Gary Gensler last month to ask for a “pause” in new listings from Chinese companies, according to Reuters. The SEC has begun asking Chinese companies to disclose more information about the risks involved in investing in them.

Didi, more or less the Uber of China, bought Uber’s operations in the country in 2016. Didi went public this summer in the United States, raising $4.4 billion through its IPO and reaching a valuation of  $73 billion. 

But not long after its IPO, the Cyberscape Administration of China banned new user registrations for the Didi app in China. Later, Didi said the Chinese government ordered its app be removed from app stores because of some issues connected to personal data collection. 

In other words, regulators clamped down on Didi and effectively stopped the company from gaining more customers. Naturally, its stock price took a hit. While Didi closed out its first day of trading up 1 percent at $14.14, its stock price soon tanked, closing at $8.70 on Tuesday. 

“When companies go down a lot, when investors start to lose money, the SEC is always in the spotlight,” said Josef Schuster, founder of IPOX Schuster LLC. “Investors have lost a significant amount of money in Chinese companies that have listed in the U.S. to date, not just in the U.S. also in Hong Kong.” 

Schuster pointed to the lackluster performances of Didi and KE Holdings, which went public last year. Their poor stock-market performances are “way beyond some internet stocks and so forth.” 

Schuster said this is the first time he could recall the SEC pausing issuances from a certain country. China has paused its own IPOs in mainland China and Hong Kong, though, in the past to manage deal flow.

For most of the Chinese companies that went through an IPO in 2021, the returns are “among the worst of any subset of the U.S. IPO market this year,” Kennedy said. 

Despite the crackdowns by both the U.S. and China, some Chinese companies have still managed to file F-1 registration documents with the SEC — Shenzhen, China-based Iczoom, for example, filed an F-1 on Monday — although it’s unclear if those IPOs will be completed by the end of the year.

The Chinese government, at least, seems to be more concerned with large issuers like Didi listing in the U.S., Kennedy said.

“I think we’ve got powerful forces on both sides of the Pacific stopping these listings,” he or she said. “So I can’t see any substantial activity from China for the rest of the year.”

Illustration: Dom Guzman

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