Chinese companies rushed to go public in U.S. markets this year, making 2021 one of the busiest years for listings of China-based startups.
But all that activity is effectively on pause, thanks to a series of moves reported by the Securities and Exchange Commission, and it seems unlikely to pick up again by year-end, according to Matt Kennedy, senior strategist at IPO research firm Renaissance Capital.
“We think Chinese IPOs may have slowed because of the law that went into effect late last year,” Kennedy said, referring to a law that allows the Public Accounting Oversight Board to review auditors of U.S.-listed Chinese companies, which is a law that allows the SEC to review auditors of Chinese companies. What ended up happening is that we saw an increase in U.S. listings of Chinese issuers trying to raise money in the U.S. market before the rule change. So I guess we knew the end would come eventually.”
It was surprising that so many Chinese companies decided to go ahead and move faster with their plans when the Chinese government was also trying to dissuade them, Kennedy added.
There have been more Chinese companies making initial public offerings on the New York Stock Exchange and Nasdaq in 2021 than in any other year in the past decade, according to Crunchbase data. So far this year, 34 China-based companies have had an IPO on the Nasdaq and NYSE, surpassing 2018’s record 33 companies.
But the Chinese government’s crackdown, particularly on new ride-hailing giant Didi and the ed-tech industry, prompted SEC Chairman Gary Gensler last month to call for a “pause” on new listings of 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 U.S., raising $4.4 billion through its IPO and reaching a valuation of $73 billion.
But not long after its IPO, China’s Cyberscape Administration banned new user registrations for the Didi app in China. Later, Didi said the Chinese government ordered its app to be removed from app stores due to some issues related to personal data collection.
In other words, regulators cracked down on Didi and effectively prevented the company from gaining more customers. Naturally, its stock price took a hit. While Didi closed its first day of trading up 1 percent at $14.14, its share price soon plummeted, closing at $8.70 on Tuesday.
“When companies go down a lot, when investors start losing 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 been listed in the U.S. to date, not only in the U.S. but also in Hong Kong.”
Schuster pointed to the lackluster performances of Didi and KE Holdings,which went public last year. Their poor stock market performance is “far beyond some Internet stocks and so on.”
Schuster said this is the first time he can remember the SEC pausing a given country’s issuances for some time. However, China has paused its own IPOs in mainland China and Hong Kong in the past to manage deal flow.
For most of the Chinese companies that went through an IPO in 2021, returns are “among the worst of any subset of the U.S. IPO market this year,” Kennedy said.
Despite 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), though it’s unclear whether those IPOs will be completed by the end of the year.
The Chinese government, at least, seems to be more concerned about large issuers such as Didi that are listed in the U.S., Kennedy said.
“I think we have powerful forces on both sides of the Pacific stopping these listings,” he said. “So I can’t see any substantial activity from China for the rest of the year.”
