Following the stricter regulation of the IPO approval process last year, the number of Chinese A-share IPOs plunged 76.6%. This equates to a 52.2% drop in overall Chinese equity capital markets volume year-on-year.
But offshore issuance bucked the trend. It saw the highest deal activity since 2010 as 117 companies applied to list offshore.
The technology sector took full advantage of less stringent regulatory approvals in New York and Hong Kong, with 36 out of the 117 companies coming from the sector.
Losing those deals to offshore jurisdictions has prompted the China Securities Regulatory Commission (CSRC) to have a public consultation on a new Shanghai-based board named “Science and Technology Innovation Board”. That consultation process closed at the end of February.
Citing the need to incentivise tech companies and start-ups to list domestically, a raft of new proposals have been put forward in the consultation paper.
Key rule changes include allowing weighted voting rights structures (WVR), pre-profit companies and red chip companies to list on the new board without the necessary profit profile that the current A-share listing approval process mandates.
These key changes follow Hong Kong’s relaxation of listing rules in April last year for companies in the tech sector. Unsurprisingly, Hong Kong Exchanges enjoyed a record year in 2018, with $277.85 billion raised through IPOs. That is the most since 2010, according to the Hong Kong Exchange results.
As the above graph shows, when A-share listings are suspended or when tighter regulations are imposed on prospective IPO candidates, the volume of offshore listings rises.
Since the $25 billion Alibaba flotation in 2014, there has been a steady increase in tech offshore volume from Chinese companies.
Offshore tech listings increased by 35.5 times between 2015 and 2018. Last year saw a record 36 tech IPOs, worth nearly $40 billion and which outpaced onshore activity for the first time since 2013.
Of the top 20 tech listings in the past four years, only five companies have floated onshore, with the remaining 15 listing in either the US or Hong Kong.
And now it seems that the CSRC is attempting to lure back the tech sector with the proposed Science and Technology Innovation Board.
To be sure, less stringent criteria to encourage more new economy companies to list in the domestic market would boost the number of onshore IPOs in China.
But by the same token, loosening those same restrictions must surely run the risk of allowing companies that are not necessarily at the right level of profitability to list. That would erode investor rights and protections, one of the core attributes of a regulated industry.
The CSRC has addressed these concerns to a certain extent. At the beginning of March, it said that it would step up oversight on companies listed on the new board and crack down on illegal activities such as fraudulent issuance and false statements.
And according to Dealogic, this new board may become active as soon as June, which is likely to stimulate onshore listing in the second half of the year.
It looks like Hong Kong and New York exchanges may well have a fight on their hands for the next wave of Chinese tech company listings.