Chambers Greater China Region Guide 2022: Capital Markets: Debt & Equity (PRC Firms)
Chambers Greater China Region Guide 2022: Capital Markets: Debt & Equity (PRC Firms)
During the 14th Five-Year Plan period, China's economic development has entered a new development stage where "domestic and foreign markets can boost each other, with the domestic market as the mainstay". The deepening reform of China's capital market has accelerated, the capital market system structure has become clearer, the regulatory policies have been further improved, and the ability to serve the real economy has been further enhanced.
Steady progress in the reform of the registration system which started to shape a multi-level c apital market system
In terms of regulatory policies, ever since the National People's Congress authorised the State Council to implement the registration system reform on the Shanghai and Shenzhen Stock Exchanges in 2016, the Shanghai Stock Exchange established the Science and Technology Innovation Board (“SSE STAR”) and piloted the registration system in 2019, the Shenzhen Stock Exchange's ChiNext Market (“ChiNext”) completed the registration system reform in June 2020 and the Beijing Stock Exchange was established with the registration system in September 2021. At present, the registration system reform of the main board of the Shanghai and Shenzhen Stock Exchanges is progressing steadily. With the market-wide implementation of the registration system in the capital markets, stock issuance in mainland China will enter an era of registration system from the approval system previously. The new Securities Law clarifies the responsibilities of regulators under the registration system, simplifies issuance conditions, stipulates the information disclosure obligations of market participants such as issuers and intermediaries, and determines the securities representative litigation mechanism. The above rules lay the grounds for the implementation of the systematic and comprehensive registration system.
In terms of the capital market framework, with the cancellation of the selection layer of the New Third Board and the establishment of the Beijing Stock Exchange, China's capital markets have started to form a multi-level capital market system composed of floor trading markets represented by the Beijing, Shanghai and Shenzhen Stock Exchanges, and curb trading markets represented by the New Third Board and the national regional equity trading markets. The positioning of each market board is different but interconnected, forming a “progressive” market system with effective mechanism regarding listing and delisting. The details are as follows:
• The New Third Board and the national regional equity trading markets serve early-stage small and medium-sized enterprises (“SMEs”).
• The Beijing Stock Exchange serves innovative SMEs.
• The SSE STAR board serves companies in high-tech industries and strategic emerging industries, and the ChiNext serves innovative and entrepreneurial enterprises.
• The main board of Shanghai and Shenzhen Stock Exchanges serves large blue-chip enterprises.
Enterprises which choose to be listed on the New Third Board can apply for listing on the Beijing Stock Exchange later. If they meet the listing requirements of the Shanghai and Shenzhen Stock Exchanges, they can apply to transfer to the SSE STAR and the ChiNext. At the same time, in order to meet the requirements of the registration system reform and the normalised delisting, regulatory authorities have further improved the delisting standards and established a market-oriented and diversified delisting standard system covering the categories of “financial issues, transactional issues, regulatory issues, and issues concerning material breach of law”. If a company listed on any board in Beijing, Shanghai and Shenzhen triggers the delisting indicator, it may be transferred from the floor trading market to the curb trading market - the New Third Board's delisted company board.
Supervision and cooperation on overseas listing further strengthened, with the level of opening-up continuously improved
With the crisis of confidence caused by several default incidents of Chinese concept stocks since 2020, and the implementation of the Holding Foreign Companies Accountable Act by the United States to strengthen the control and supervision of foreign companies' listing in the United States, regulatory authorities in China have become increasingly concerned with the risk of national security issues associated with overseas listing of domestic Chinese enterprises, and the necessity of comprehensive supervision of such listings has become particularly prominent. Regulatory policies and regulations on domestic and overseas regulatory cooperation have subsequently been issued.
In terms of regulatory policies, the overseas listing of domestic enterprises will officially enter the era of comprehensive filing system. In December 2021, the China Securities Regulatory Commission (“CSRC”) issued a statement on the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Administration Provisions”), and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Filing Measures”) to solicit public comments.
On the one hand, the introduction of the Administration Provisions and the Filing Measures has made the principled supervision of overseas listings institutionalised and transparent. According to these rules, whether domestic companies are listed overseas directly (H-share listing) or indirectly (using a red-chip structure), the domestic review procedures will no longer be differentiated, and the filing system will be implemented uniformly.
On the other hand, due to national security concerns caused by overseas listing of domestic enterprises, the aforementioned rules and other rules and regulations which took effect in 2022, including the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Edition) (the “2021 FDI Negative List”) and Cybersecurity Review Measures, have jointly established the collaborative supervision model across multiple departments, and the security review procedure from the perspective of foreign investment security, cybersecurity/data security and other national security. The 2021 FDI Negative List has clarified that domestic enterprises engaging in businesses in fields prohibited from investment in the 2021 FDI Negative List shall be reviewed and approved by the relevant competent state authorities for issuing shares and going public for trading overseas; The Cybersecurity Review Measures have clarified that Chinese network platform operators holding more than 1 million individuals’ personal information must apply for a cybersecurity review prior to listing overseas, and that competent authorities may initiate a cybersecurity review where there are other situations that may affect national security. However, the legality of the VIE structure, the review standards for foreign investment, and the standards and boundaries of cybersecurity review still lack reference and specific rules for implementation.
In terms of regulatory cooperation, China and the United States have recently conducted dialogues and consultations on the audit of Chinese concept stocks, and discussed the issue of reasonable and legal inspections of Chinese accounting firms engaged in Chinese concept stocks auditing in China. The Provisions on Strengthening the Confidentiality and File Management Work Related to the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comment) provides for approval/filing procedure of classified or sensitive information, intending to implement confidentiality and filing requirements for domestic enterprises prior to their providing information to securities service institutions, overseas institutions and individuals, thus providing institutional guarantee for improving cross-border supervision cooperation arrangements and carrying out cross-border supervision cooperation safely and efficiently.
Step-by-step establishment of a unified debt market supervision system, and the introduction of new debt products
In terms of debt supervision, since the implementation of the new Securities Law in 2020, a unified registration system has been implemented in the issuance review of corporate bonds. Ever since, the registration system has been implemented in the issuance review of corporate bonds in the exchange bond market, which were previously supervised by the CSRC, and enterprise bonds, which used to be supervised by the National Development and Reform Commission (“NDRC”). The new supervision approach of those bonds is now similar to that of financial corporate bonds in the interbank market supervised by the People's Bank of China (“PBOC”). In addition, in order to strengthen the information disclosure and supervision system in the corporate bond market, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law (the “Opinions”) in July 2021. Six ministries, including the PBOC, jointly issued the Guiding Opinions on Promoting the Reform and Opening-up and High-Quality Development of the Corporate Bond Market (the “Guiding Opinions”) in August 2021. The Opinions and the Guiding Opinions aim to promote the convergence of the rules and regulations of the interbank bond market and the exchange bond market, to unify the disclosure requirements for the issuance and duration of corporate bonds and allow the unified law enforcement of the bond market by the CSRC. Therefore, a unified supervision system in the corporate bond market is taking shape step by step.
In terms of debt products, regulatory rules for the corporate bond market have been further improved, and new products have been introduced. In April 2021, the PBOC, the NDRC and the CSRC jointly released the Green Bond Endorsed Projects Catalogue (2021 Edition), which for the first time have uniformed the definition standards for green projects and promoted the integration of China's green bond market with international standards. In 2021, the National Association of Financial Market Institutional Investors launched a variety of innovative green bonds such as “carbon neutral bonds”, “green bonds for rural revitalization” and “sustainability-linked bonds”. In 2022, the interbank market successively launched “rural revitalization notes”, “scientific and technological innovation notes” and “frequent issuer program (FIP)”. In May 2022, the Shanghai and Shenzhen Stock Exchanges issued and implemented the No. 6 Guidelines for Innovative Variety Business of Corporate Bonds - Scientific and Technological Innovation Corporate Bonds, launching “scientific and technological innovation corporate bonds” on the basis of the existing innovation bond, supporting four types of issuers: scientific and technological innovation, scientific and technological innovation upgrading, scientific and technological innovation investment and scientific and technological innovation incubation.