Politics

Wall Street banks rush to rescue China’s IPO pipeline after Didi .’s shock

Global investment banks are rushing to redirect IPOs by Chinese groups to Hong Kong after new cybersecurity regulations from Beijing shut down lucrative tech listings that previously went to New York.

About 20 Chinese companies had announced plans to raise $1.4 billion from the New York stock sale later this year, data from Dealogic shows. But that was before Beijing regulators launched an investigation into Didi Chuxing, just days after the Chinese ride-hailing group’s $4.4 billion New York IPO, shares 20 percent down of the IPO prices.

The intervention has further questioned US listings and sparked a battle to divert deals. Advising Chinese companies on IPOs has been a lucrative business for banks including Goldman Sachs and Morgan Stanley, generating $460 million fee income from this work in the first half of the year.

“We talk about it with everyone. All Chinese issuers planning the New York IPOs are considering moving to Hong Kong,” said a senior capital market banker in Hong Kong.

Strict listing rules in Hong Kong, such as minimum profitability requirements, meant many companies would struggle, he said. “If you want to make a deal this year, at best you will be delayed until 2022 and at worst you won’t be able to do it,” he added.

In the first half of the year, 34 Chinese companies raised $12.4 billion in New York IPOs, a record in both respects, helping to maintain US banks’ fee income even as tensions between the US and China worsened. More than $2 trillion worth of shares are already traded in New York.

Hong Kong appears to offer a good alternative, bankers and lawyers say, as Beijing’s control of the financial center means it will be less affected by the new foreign listing rules that have hit New York stock sales.

Column chart of funds raised by US IPOs of Chinese companies ($ billion) showing that Wall Street's Chinese trading has risen in recent years

Data security issues raised by the Didi Chuxing shock are at the heart of China’s crackdown. Days after that fateful IPO, Beijing’s Cyberspace Administration of China, or CAC, launched a… cybersecurity assessment in the company.

Top officials in Beijing then called for a new regulatory regime to control foreign IPOs, and the CAC proposed rules banning companies with more than 1 million users from advertising abroad without a security review and official approval.

Two Wall Street bankers in Hong Kong said companies with a large data component to their business were among the fastest to switch their plans to Hong Kong and swallow the associated delays and costs. “If you don’t have a data corner, they will wait for things to calm down and see. The problem is that no one wants to be first,” said one banker.

Chinese tech groups going public have long favored New York thanks to its deeper, more liquid markets and ease of listing compared to Hong Kong, where companies are vetted by both the city’s securities regulator and the exchange. Bankers also enjoy higher fees of 5 to 7 percent on funds raised through the sale of shares in the US, compared to about 2 percent in Hong Kong.

Bruce Pang, head of research at investment bank China Renaissance, said Chinese listings in New York would suffer until the details of the new regulatory regime had crystallized among perhaps a dozen Chinese regulators — after which it could be months before companies trading abroad. want to be listed on the stock exchange, get approval.

Bar chart of investment bank H1 earnings from Chinese New York IPOs ($m) showing that Chinese listings have brought record fees for Wall Street banks

Pang added that a growing number of Chinese companies faced an urgent need to go public. “If they can’t wait, Hong Kong is their only choice,” he said.

The biggest beneficiaries of the new rules so far are Hong Kong Exchanges and Clearing, whose shares are up 14 percent this month.

The Hong Kong Stock Exchange this year appointed its first non-Chinese chief executive, Nicolas Aguzin, a former JPMorgan banker who was born in Argentina.

Aguzin will be tasked with maintaining HKEX’s attractiveness to mainland Chinese issuers, which make up more than 80 percent of its equity, while making it more attractive to foreign issuers, which have largely disappeared since a wave of luxury goods, including Prada. and Samsonite, listed ten years ago.

However, a senior executive at HKEX said that while the exchange may benefit from diverted IPOs in the near term, “the direction of travel doesn’t look good”.

“At the moment publishers are tightening the screws, but the next logical step is to tighten the screws on investors,” the executive said. “I predict that governments and regulators will make it harder for that capital to flow.”

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