Hong Kong IPO pipeline may suffer amid scrutiny of ‘red-chip’ listings

Beijing’s tightened scrutiny of plans by Chinese companies incorporated outside mainland China to list in Hong Kong could have a significant impact on the city’s rich IPO pipeline - at least in the short-term, bankers and lawyers said.

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Bull statues near screens showing the Hang Seng stock index outside Exchange Square, in Hong Kong.

(REUTERS FILE)

Sources have said authorities have told some so-called red-chip companies that they should change their domicile back to China before going public.

Such firms are registered abroad, mainly in tax havens, but hold assets and businesses in China via equity ownership.

‘The China Securities Regulatory Commission confirmed that some red-chip companies have recently received guidance to unwind their structure. That means some IPOs could be delayed by at least six months as red-chip companies scramble to change their domicile, bankers and other experts said, adding that some might even have to abandon their IPO plans as changing the legal structure of the company could be cost-prohibitive.

Foreign interest in Chinese firms could also take a hit.

"For foreign investors, the dismantling of red-chip structures could reduce flexibility regarding equity stakes and future divestment," said Kenny How, a councillor at the Hong Kong Securities Futures Professional Association.