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CHINA (PRC FIRMS): An Introduction to Capital Markets: Hong Kong and Overseas Issuances

China Capital Markets Overview 

In 2020, China’s capital markets entered their thirtieth year. Entering into 2021, new rules and regulations released by the regulatory authorities have had a profound influence on capital markets both domestically and overseas.

As of 31st December 2021, there were a total of 4,697 listed companies in the A-shares market. Benefiting from the domestic economic recovery, reform and development of the registration system and the establishment of the Beijing Stock Exchange, 522 companies were successfully listed in the A-shares market in 2021, an increase of 127 compared with 2020. However, the situation of A-shares issuers queuing up for listing has not changed significantly. By 31st December 2021, there were around 900 potential issuers that were under review and waiting to be listed in the A-shares market. In the third and fourth quarters of 2021, the selected layer of the National Equities Exchange and Quotations (“NEEQ”) board and the Beijing Stock Exchange both opened for trading. The introduction of a transmission mechanism between these two boards was also a milestone for China’s capital markets. The China Securities Regulatory Commission (“CSRC”) enhanced its supervision of both issuers and the commission itself, and in 2021, the CSRC issued the “Guidelines for the Application of Regulatory Rules - Disclosure of Shareholder Information by Companies Applying for Initial Public Offerings”, “Guidelines for the Supervision of Investment Behaviour of Resigned Staff in the Securities Regulatory Commission System” and the revised “Guidelines for the Evaluation of Science and Technology Innovation Attributes”, and other regulations applicable to A-shares issuers. In general, the A-shares market became more strictly regulated in 2021, which in turn became more burdensome for issuers preparing for listing.

The number of newly listed companies in the Hong Kong market decreased in 2021, but the number of newly listed biotech companies rose suddenly this year. The number of newly listed domestic companies on the Hong Kong Stock Exchange (“HKEX”) in 2021 dropped from 109 to 87, compared with 2020, and total funds raised also dropped from approximately CNY300 billion to CNY241 billion. However, Hong Kong is still the priority choice for domestic companies that intend to go public overseas. Although, the number of newly listed companies has declined, and the time taken by the HKEX to review applications has grown longer, biotech companies are unexpectedly bucking the trend. The twenty newly listed biotech companies in 2021 was the highest number on record since the promulgation of Chapter 18A of the Main Board Listing Rules of HKEX in April 2018. In May 2021, HKEX announced the main board profit consultation summary, and in the last two months of 2021, HKEX published the consultation summary on optimising and simplifying the rules for overseas issuers, broadened the secondary listing channels, and officially announced that the Special Purpose Acquisition Company listing would take effect on 1st January 2022.

Domestic regulatory policies also affected US capital markets in 2021, causing Chinese companies to encounter numerous difficulties listing in the US. The implementation of the “double reduction” policy in the education industry and the publication of Measures for Cybersecurity Review by the Cyberspace Administration of China and other rules relating to data security and personal information protection led to Chinese companies delaying listing in the US or considering listing in Hong Kong instead. The immediate consequence was that a total of 36 Chinese companies were listed in the United States, among which, 35 companies were listed in the first half of 2021, with no other Chinese companies getting listed in the US since August 2021. In addition to the pressure of the domestic regulatory environment, those US-listed Chinese companies also face challenges from the Holding Foreign Companies Accountable Act. However, CSRC, the US Securities and Exchange Commission, and the Public Company Accounting Oversight Board are constructively discussing the possibility of China-US audit cooperation.

By the end of 2021, draft versions of the “Regulations Regarding the Administration of Domestic Companies’ Overseas Securities Issuance and Listing” and the “Administrative Measures for Filing of Domestic Companies’ Overseas Securities Issuance and Listing” laws were issued to solicit public opinions, and the “Special Administrative Measures (Negative List) for Access of Foreign Investments (2021 Edition)” also specifically added regulations relating to overseas listing by domestic companies. These regulations will also have a far-reaching impact on China’s capital markets once they are implemented.