Chinese authorities are trying to formulate new regulations that would prevent domestic internet based companies from getting publicly listed in the United States, said a report published by The Wall Street Journal on Friday.
The Journal reported, citing people familiar with the matter, claimed that the specific target of Chinese regulators are those etch companies that deal with have user-related data, while companies that do not depend so intensively on data such as pharmaceutical companies could be kept out of the new regulation.
The Invesco Golden Dragon China ETF (PGJ), which tracks US listed Chinese shares consisting of ADRs of companies that are headquartered and incorporated in mainland China, has lost 26 per cent so far this quarter while there has been increased regulatory pressure in China on the firms.
The Journal reported that Beijing has not yet finalised the new rules and regulators there plans to implement them starting in the fourth quarter.
Two aspects of regulation that companies wanting to go public must comply with were laid out by China’s cybersecurity regulator earlier this week. One of them is the national laws and regulations, while the other is ensuring the security of the national network, “critical information infrastructure” and personal data.
The regulators have previously stated that public communication and information services, energy, transportation, waterworks, finance and public services are the industries that are deemed to have critical data.
Companies in a range of industries – from tech to education and gaming, have been targeted by Chinese regulators of late, while authorities have also imposed more restrictions on cross border flow of data and data security. Some of China’s most powerful companies, including Didi, Alibaba and Tencent, have come under stringent scrutiny of the Chinese government.
On the other hand, oversight of Chinese firms trying for get listed in the US has been stepped up by the Securities and Exchange Commission. Companies seeking to get listed in te US will have to make additional disclosures about the structure of the company and about any and all risks the company’s business faces in the future because of actions of the Chinese government, the agency said.
Major Chinese companies including Alibaba and JD.com, use the so-called variable interest entities as a company structure for getting listed in the US while they manage to avoid oversight from Beijing as the country as direct foreign ownership is not allowed in the country for most industries.
Use of these variable interest company structures allow China based operating companies to set up offshore shell companies in another jurisdiction and issue stocks to public shareholders.
(Adapted from WSJ.com)