For two decades, Chinese tech companies have flocked to the U.S. stock market, drawn by a friendly regulatory environment and a vast pool of capital eager to invest in one of the world’s fastest-growing economies. Now that trend appears to have been stopped in its tracks.
China’s newly empowered cybersecurity regulator announced on July 10 that any company with data on 1 million or more users would need its approval to go public in another country. That rule would cover a wide swath of businesses and amounts to a death knell for Chinese initial public offerings in the U.S., according to longtime industry watchers. “It’s unlikely there will be any U.S.-listed Chinese companies in 5 to 10 years, other than perhaps a few big ones with secondary listings,” says Paul Gillis, a professor at Peking University’s Guanghua School of Management in Beijing.
The clampdown was triggered by ride-hailing giant DiDi Global Inc.’s decision to push ahead with a New York listing despite objections from regulators. It’s already sending shock waves through markets: A gauge of U.S.-traded Chinese stocks has dropped about 30% from its recent high. For investors in companies that have yet to list, there’s growing uncertainty over when they’ll be able to exit their investments via public markets. Wall Street banks are bracing for lucrative underwriting fees to dry up, and Hong Kong is set to benefit as Chinese com panies look for politically safer venues closer to home.
It’s hard to overstate the importance U.S. markets have held for Chinese companies. Since 1999 more than 400 of them, including most of the country’s technology industry, have picked U.S. exchanges for their primary listings, raising more than $100 billion. Chinese companies listed in the U.S. are valued at $2 trillion. Most trade as American depositary receipts (ADRs)—surrogate securities that allow investors to hold overseas shares.
Website operator China.com Corp. in Hong Kong began the trend when it went public on the Nasdaq during the dot-com bubble. The stock, with the ticker CHINA, surged 236% on its debut, enriching founders and backers and showing Chinese internet companies a pathway to foreign capital. All they needed was to find a way around the Communist Party’s strict regulatory controls.
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