On August 11, 2020, in New York City, USA, on a hot day, a man walked his dog in the shade away from the midday sun, passing by the New York Stock Exchange (NYSE) building in Manhattan.
Fresh Mike | Reuters
BEIJING – Chinese authorities this week announced new policies to support venture capital, raising hopes of faster approval of initial public offerings in the near future.
China’s once-thriving ecosystem of investment capital and new startups has slowed sharply over the past three years due to increased regulatory scrutiny.
As one of the latest steps to shore up the industry, China’s top executive body, the State Council, released late on Wednesday high level measures To “promote Venture capital for high-quality development“.
“Everything will depend on the implementing regulations,” said Marcia Ellis, global co-chair of Morrison & Foster’s private equity practice.
“It’s positive that the central government is aware that there is a problem,” Ellis said. “At least in terms of technology investment, venture capital can be a positive force in the Chinese market and, frankly, help China compete with the United States in the technology race.”
In terms of actions to watch, Ellis said, “In terms of IPOs, what we’re really hoping for is if approvals start coming at a faster pace.”
“Venture investors are not going to invest unless they can see a pretty clear exit path,” she said, noting that hasn’t been the case in the past year or so.
New policies include expanding venture capital exit pipelines and focusing on supporting companies with technological breakthroughs. The “Measures” also require the implementation of overseas listing management systems and smooth exit channels for non-RMB venture capital funds.
“The real bottleneck in overseas listings lies in the overseas IPO process and foreign exchange rules,” said Winston Ma, adjunct professor at New York University School of Law.
The pace of domestic and overseas public offerings has slowed down. Investors, especially those who put dollars into Chinese venture capital funds, prefer IPOs in the U.S. because the U.S. is the largest and most liquid market.
Liao Ming, founding partner of Prospect Avenue Capital, said that looking forward, “the market is paying attention to the speed of U.S. IPO approvals.”
Challenges faced by overseas IPOs
Since ride-hailing company Didi Chuxing went public in the U.S. in 2021, Chinese authorities have stepped up scrutiny and introduced new rules for overseas IPOs. It is reportedly under government investigation. In addition, the United States has strengthened its scrutiny of U.S. capital entering China, especially military-related entities.
Previously, lack of supervision also led to many high-profile fraud cases involving Chinese companies’ IPOs in the United States.
Morrison Foerster’s Ellis warned of how the new policy could encourage widespread participation in venture capital by businesses and research institutions.
“Unfortunately, I think if companies that are not professional investors start doing this and they’re doing it because they’re being encouraged by the government, it could be more damaging to the market in the long run because they’re going to lose money. , and will continue to do so. “You need professionals to do this. “
The Securities and Futures Commission has strengthened penalties for misleading investors and clarified the requirements for overseas IPOs. Last year, it announced updated regulations, effective from March 31, 2023, requiring domestic companies to comply with national security measures and personal data protection laws before listing overseas.
since then, 73 companies have been listed in the United States Fang Xinghai, vice chairman of the committee, said at a meeting on Wednesday that there were 85 people in Hong Kong, according to state media.
Fang said in the report that the IPO processing speed is not fast enough and will be accelerated, adding that the China Securities Regulatory Commission supports mainland Chinese companies to list overseas, especially in Hong Kong.
Fast fashion giant Shein is reportedly trying to distance itself from its Chinese roots and has reportedly moved plans for a U.S. listing to London amid regulatory scrutiny.
Venture capital in China for China
China has also sought to develop its domestic stock market, which is only about 30 years old.
Morgan Stanley equity analysts noted another comment Wednesday by Wu Qing, chairman of the China Securities Regulatory Commission, that capital markets should increase targeted support for companies in line with the country’s efforts to develop new technologies.
Morgan Stanley’s report said: “We believe this means that capital markets may welcome more diverse IPO candidates as long as they can demonstrate innovation and drive productivity growth, although as higher standards are also in place, IPO Volumes are likely to remain low in the short term.
The new policy also requires support for international investment institutions to establish RMB funds.
“If it was easier for foreign funds to set up RMB funds, there would be money that would want to do that,” Ellis said.
“There are a lot of China-focused funds headquartered in Asia,” she said. “They are U.S. dollar funds, but their managers also want to manage onshore RMB funds because they feel they can actually raise capital in China for China investments, whereas raising U.S. dollars from the U.S. or even Europe for China-focused funds is now very difficulty.
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