China to curb US IPOs by entertainment companies
The Chinese government on Saturday announced tough new rules that will limit the listing of mainland tech companies on U.S. stock markets. Surprisingly, this looks like an area where the two superpowers are likely to get along.
The move will prevent a repeat of the embarrassing incident that happened this month where running giant Didi Chuxing registered in New York but was twice hit with regulatory penalties in the next week Initial Public Offering.
The new rules, however, may cripple fast-growing Chinese tech and entertainment startups that find an attractive US listing due to the US’s lower breakeven and size thresholds compared to the Hong Kong or Chinese stock exchanges. . A company like the Chinese streamer iQiyi which has never made a profit during its 11 years of existence would not have been entitled to an IPO in China, but it was successfully introduced to NASDAQ in March 2018.
The new regulations were described by the Chinese government-backed Global Times as “a broad set of draft rules for cybersecurity exams on domestic internet companies seeking overseas listings.”
Chief among these is “the requirement for all Internet product and service providers who collect data on over 1 million users to apply for cybersecurity review and approval before seeking an IPO. abroad”.
Considering the size of the Chinese industry, this likely means that all significant tech and entertainment companies are covered by the regulations. Part of the review process will require Chinese companies to show that they are complying with a national security law.
A security review can look at a company’s information infrastructure and the chances of it being hacked or controlled and personal data extracted. Businesses will also need to show that their basic information infrastructure, data, and users’ personal information cannot be “influenced, controlled or used maliciously” by foreign governments.
It is a measure that directly responds to US controls on Chinese companies such as TikTok and Huawei introduced by former US President Donald Trump. Joe Biden’s current regime in the United States has reduced hostilities against TikTok, but has nonetheless called for a review of the security of “foreign adversaries” applications.
The IPO’s security measure is also in line with China’s recently passed Data Security Law and its forthcoming Personal Information Protection Law.
Chinese ruling means US and Chinese governments are now campaigning against further IPOs of Chinese companies in the US
The Trump administration in the United States has opposed Chinese companies listed on the United States. It is estimated that there are around 400 of them.
The Holding Foreign Companies Accountable Act prohibits foreign companies from continuing to be listed in the United States if the company does not comply with audits to U.S. standards for three consecutive years.
This has led companies like the e-commerce and entertainment giant Ali Baba express each of its income statements according to two different standards and also launch a secondary listing of shares in Hong Kong. This is in addition to its main listing in New York, but it could become the main listing for the company if Alibaba is ever kicked out of the US market.
Other Chinese companies may be forced to withdraw from the New York Stock Exchange and NASDAQ and re-list in Hong Kong or a mainland China stock exchange, to allay Chinese regulatory fears that sensitive data may be. transmitted to American listeners.
The Bloomberg financial news agency also reports that Chinese authorities are re-examining the acceptability of VIEs or variable interest entities. This mechanism is widely used to circumvent Chinese rules that limit foreign ownership.
The VIE structures see the creation of parallel companies, one in China, one in a tax shelter abroad. Under a contractual arrangement, rather than an ownership position, the Chinese company pays part of its profits to the foreign company which can be privately owned or floated on the stock exchange. For now, China is turning a blind eye to VIEs, but in the future it may require companies to apply for a permit.
Like China’s new IPO rules, a ban on VIEs would unravel East-West corporate relations and reinforce the growing separation of business and data between China and the world. western.
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