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

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Global investment banks are rushing to redirect initial public offerings from Chinese groups to Hong Kong after new cybersecurity rules instituted by Beijing cut off lists of lucrative technologies that were previously heading to New York.

About 20 Chinese companies had publicly announced their intention to raise $ 1.4 billion from the sale of shares in New York this year, according to data from Dealogic. But that was before Beijing regulators launched an investigation into Didi Chuxing, just days after the Chinese rideshare group’s $ 4.4 billion IPO in New York. News of the investigation caused Didi’s shares to drop 20% from the price of its IPO.

The intervention of Chinese regulators has cast doubt on other U.S. listings and sparked a rush to redirect the deals. Advising Chinese companies on IPOs has been a lucrative business for banks, including Goldman Sachs and Morgan Stanley, generating $ 460 million in commission income in the first half of the year.

“We talk to everyone about it. All Chinese issuers considering IPOs in New York are looking at whether they can pivot to Hong Kong, ”said a senior capital markets banker in Hong Kong.

Strict listing rules in Hong Kong, such as minimum profitability requirements, meant that many companies would struggle to sell shares in the territory, the banker 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.”

In the first half of the year, 34 Chinese companies raised $ 12.4 billion in New York IPOs, a record in both cases, helping to prop up commission income for U.S. banks amid U.S.-China tensions. were getting worse. More than $ 2 billion in stocks are already trading in New York.

Column chart of funds raised in US IPOs of Chinese companies (in billions of dollars) showing that Wall Street trading in China has increased in recent years

Hong Kong seemed to offer a good alternative, bankers and lawyers said, as Beijing’s control over the financial center meant it would be less affected by new foreign listing rules that affected sales of shares in New York.

Data security issues, highlighted by the Didi shock, are at the center of the Chinese crackdown. Days after the ill-fated IPO, the Cyberspace Administration of China, or CAC, launched a review of cybersecurity at the company.

Senior officials in Beijing then called for a new regulatory regime to control overseas IPOs, and the CAC proposed rules prohibiting companies with more than one million users from registering with the foreigner without security screening or official authorization.

Two Wall Street bankers in Hong Kong said companies with a large data component in their operations were among the fastest moving their listing plans to Hong Kong and swallowing the delays and associated costs. “If you don’t have a data angle, they’ll wait until things calm down and see. The problem is, no one wants to be first, ”said one banker.

Chinese tech groups that have gone public have long favored New York for its deeper, more liquid markets and ease of listing compared to Hong Kong, where companies are controlled by both the city’s securities regulator and the stock exchange. . Bankers also benefit from a 5 to 7 percent higher fee on funds raised through the sale of stocks in the United States, compared to around 2 percent in Hong Kong.

Bruce Pang, head of research at investment bank China Renaissance, said Chinese listings in New York would suffer until details of the regulatory regime were disclosed to a dozen Chinese regulators – after which it could take months for companies seeking to register overseas to gain approval.

Bar chart of first half investment banking income from Chinese IPOs in New York (millions of dollars) showing China quotations generated record fees for banks on Wall Street

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

The main beneficiary of the rules has been Hong Kong Exchanges and Clearing, whose shares have jumped 14% this month.

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

Aguzin will be responsible for maintaining the attractiveness of HKEX with mainland Chinese issuers, which represent more than 80% of its equity, while improving its image with foreign issuers, which have largely disappeared since a wave of luxury products, including Prada and Samsonite, listed a decade ago.

However, a senior HKEX executive said that while the exchange could benefit in the short term from backdoor IPOs, “the direction of travel does not look good.”

“Right now the screws are on the issuers, but the next logical step is to screw the investors,” the executive said. “I predict that governments and regulators will make it harder for this capital to flow.”

Video: Will China Become the Center of the Global Economy?

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