Changes to Chinese Listing Rules and Updates on Alibaba

Intralinks Mergermarket Dealcast M&A Podcast

In this week's episode, we're talking about new Chinese listing rules and what this means for Chinese companies looking to list overseas with Perris Lee, Asia ECM Editorial, Insights director at ION Analytics. We also discuss what is happening with Alibaba Group and its co-founder, Chinese billionaire Jack Ma, who has kept a low public profile since the Chinese government began cracking down on the country’s tech entrepreneurs in 2020.

Listen to learn about:

  • Overview of changes to Chinese IPO listings rules
  • What happened to the American deposit receipts (ADRs) and global depository receipt (GDR) markets
  • The re-emergence of Alibaba’s Jack Ma
  • Future of Chinese conglomerates

Dealcast is presented by Mergermarket and SS&C Intralinks.

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[MUSIC PLAYING] JULIANNA NEEDHAM: Hello and welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket SS&C Intralinks. I'm Julianna Needham, a business journalist who's been covering M&A for a decade.

In this episode, we're hearing about the new Chinese listing rules and what it means for Chinese companies looking to list overseas, plus finding out about the latest about what's going on with Alibaba and its founder Jack Ma.

Joining me is Perris Lee, ECM Asia editorial and insights director. Hi Perris. Thanks very much for joining me today.

PERRIS LEE: Thank you, Julianna. Good to see you again.

JULIANNA NEEDHAM: So let's start with looking at the changes to Chinese listing rules. Firstly, can you just outline why they've been introduced, please?

PERRIS LEE: OK, so Chinese IPO market is actually very interesting, right? That can be split into two portions, one being the domestic Asia onshore-- we also call it onshore markets. And the other one it's a huge [INAUDIBLE], which is the Chinese companies being leased overseas.

But let's have a look at what happens domestically. So we understand that since year 2000 there is a huge wave of Chinese tech companies going public overseas. Which means the first wave of Chinese tech unicorns, they are pretty much all listed overseas. And now, fast forward to 2023, so every country is trying to groom these new tech companies, new AI companies, new like self-driving technology companies. So there's an apparent intention with the Chinese government, with Beijing to keep these companies within its own country, you know, so that they can groom the company, and which, in a way, to also give the government more control over the companies as a result.

So here, [INAUDIBLE] that sort of, you know, give some kind of context to why they come up with new set of new listing rules for both onshore and offshore listings. And so let's take a look at what happens with an onshore listing. So I almost said tomorrow, but what I am talking about is March 31.

So there will be this news will go effective. There's blanket rules covering both onshore listing and offshore listings. For onshore or A-share listings, being the Chinese companies listed in domestic exchanges, that's including Shanghai Exchange, Shenzhen Exchange, and the newest exchange being the Beijing Exchange.

In the past there was this. Every company that wanted to get listed in China, they have to go through this painful review process with the regulator. And based on our system, the review process for domestic listings, under the existing system the review takes about almost 600 days.

JULIANNA NEEDHAM: Wow, so nearly two years

PERRIS LEE: Exactly. It's quite long. So the new system, which is a registration-based system, is basically identical to the US system, being the registration system. So it makes it easier for companies to get listed.

But once you get listed, everything, every subsequent move you plan to do, fundraising, M&A, will be subject to, I would say, stricter government scrutiny. So that's actually quite a positive direction for Chinese listings, because that, in a way, brings China more in line or in line with Western or global practices.

Yes, and then we -- OK, but this fast track registration-based system is actually not new to- - it's not like new to Chinese investors or the Chinese market. It has been tested in the sub-exchanges in China, including the stock exchange of Shanghai Exchange.

Stock Exchange is actually a smaller [INAUDIBLE] of the Shanghai Exchange that's a home to the tech companies and newer tech companies in Shanghai. And then so it has been tested with the Beijing Exchange. It has been tested with the Shenzhen, China exchange as well.

So based on our data, the timeline required from filing to listing with this new system, in the past-- if you look at the IPOs that happened last year. So they took about 345 days. That's almost a year. So that's pretty much the half of what it takes for a listing with the major exchanges.

JULIANNA NEEDHAM: So it's not particularly fast. But it's double the speed compared to the previous system.

PERRIS LEE: Correct. Correct. Correct. I think about at a time like this, two years versus one year. And a lot of things could happen. So I think that shorten the time by half means a lot to the companies.

JULIANNA NEEDHAM: So Perris, that is the domestic IPOs. Can we look at the rules for overseas IPOs, particularly in relation to American depository receipts or ADRs? That market's largely been shut for the last few years. Can you explain why it's been closed and what's changed now?

PERRIS LEE: Sure, thank you, Julianna. That's a very good question. I think a very timely as well as especially as the new rules will go effective on the 31st of March, which just like less than 24 hours from now.

So yes, the market has been largely shut down. If you look at the numbers, right, we do have data here. Year to date, right, how much we have seen only 10 Chinese ADRs getting listed. And they raise a total of barely $400 million USD.

So last year was when the market was largely frozen. The whole Chinese ADRs market was-- the new ADRs, they priced only $540 million. That's very little compared with the good, old days, right? The record year being 2014, when Chinese ADRs raised a total of $29 billion in two IPOs.

So what happened to these ADR markets? So since 2000 a lot of these Chinese companies, and because of like the various regulations, they were not allowed to be invested by foreign companies.

JULIANNA NEEDHAM: So the ADRs are a mechanism to allow Chinese companies to list their shares in America.

PERRIS LEE: It's actually the VIE structure, right? So they adopted these VIE, or Variable Interest Entity structure. So what happened with this various structure is that these Chinese companies, including Alibaba, Baidu, Tencent,, everyone, so they used VIE structure, which is they set up a VIE entity in such places as Cayman Island. And then they used that entity to get listed in the US so they can access overseas or foreign investors' money.

So that has been in place since the year 2000. The VIE structure was first adopted in 2000. But there's a gray area, because the Chinese regulator didn't recognize the [INAUDIBLE] VIE structure. And so they had nothing to do with these companies' financial reports whatsoever.

And that also becomes a problem for the US regulator. And then things got really, really bad in 2021 after DiDi choosing, right? Which is China's Uber raise USD 4.4 plus billion from an ADR IPO.

That deal definitely made some Chinese regulators very unhappy, because that happened when tensions between the US and China got really, really bad. And that deal also carries, you know, cybersecurity concerns. So since then both regulators now started to question the VIE structure.

So it took the Chinese regulator about two years time to come up with what to do with the VIE structure. So from 31st March Chinese regulator will recognize the VIE structure, which means that they will provide some kind of legal framework for these VIE entities to continue to exist. But however, they will also be subject to Chinese regulations for the first time.

JULIANNA NEEDHAM: And I'm guessing it means that Chinese companies can now access the global liquidity markets a bit more easily than they have been able to for the past couple of years.

PERRIS LEE: In a very selective manner, I would say. Because think about this huge regulatory machine of China, right. So there are definitely considerations -- I wouldn't say calculations-- considerations in the mind of the Chinese regulators about why am I going to recognize this VIE structure? They have to serve the national interest.

So by recognizing VIE structure, it also gives the Chinese regulator some kind of power to decide which industry can go public, and which industry you should stay at home. So from the past-- actually there was this very interesting deal that happened in February. There was a leader, which is a sensor technology being used by self-driving cars, a company that developed the technology [INAUDIBLE]. They raised almost $200 million from the ADR, from ADR pricing in February.

So that deal sends a very clear signal to the market that, OK, China doesn't want to shut down the ADR market. But it wants it to exist in a way that fits or suits China's national interest.

So we have checked with IPO market bankers and lawyers. So we find out that, yes, with self-driving technologies, since there is a very mature pool of investors and money ready for this sector in the US, so China is OK with these sectors going public in the US. But with the other sectors, you know, I'm talking about the other subsectors within the tech ecosystem, for example, the advanced chipmakers, China definitely would like them to stay within the border.

JULIANNA NEEDHAM: Great, thank you. And just keeping an eye on the time, we've got a couple more things to cover. So it sounds like now the American depository receipts system has been fixed. But there's another type of depository receipts, the GDRs that have hit a bit of a problem. Can you briefly outline what has happened there, please?

PERRIS LEE: OK, sure. So these GDR markets, right, here we're talking about the GDR that are listed in Switzerland. Because China setup-- there's this China, Switzerland connect that became effective last year, so within a year's time.

And so that market, you know, when it first started people were like-- you know, they would be very secondary, because compared with ADRs. But because ADR market wasn't functioning at that time, so we have seen a very steady flow of GDR listings of Chinese companies since then.

But that has become a problem for Chinese domestic investors, because a lot of investors in these Chinese GDRs, they are hedge funds based in Hong Kong. So for hedge funds investing in these GDRs, OK, we all know what hedge funds are doing. There's a lot of arbitrages. Which means that they buy the GDRs. And then after the four months lockup, they convert the GDRs into domestic shares in domestic China. And then they will sell the shares.

And think about it. So a lot of these GDR issuers, they were already listed in China. So for them to list in Switzerland, they have to issue the GDRs at a discount. So there's a price discount there.

So that means they buy the GDRs cheap. And then when they convert into Chinese ADR shares, they can sell at higher prices. So there's this arbitrage [INAUDIBLE] for hedge fund investors. But because of this conversion into A-shares, that actually puts a lot of downward pressure on the share prices at home. And so that has triggered a lot of complaints from Chinese domestic investors.

So Chinese regulator-- this is some kind of unexpected outcome for Chinese regulators. So since the final quarter of last year, they sort of slowed down the reviews of GDR applications. So that's something that we are keen to see how China manages to get around this predicament, while keeping the Switzerland connect alive.

JULIANNA NEEDHAM: So Perris, this conversation today wouldn't be complete without talking about Alibaba. Alibaba's just recently returned to the spotlight. And its founder Jack Ma has also reemerged. So what is the plan for Alibaba? Where has Jack Ma been? And what does it mean for other Chinese conglomerates?

PERRIS LEE: Yes, Jack Ma has pretty much stayed very low key the past few years. That's after he ran into this controversy with the Chinese government, after he criticized the regulators in late 2020.

So it took Alibaba about more than two years to come up with this major restructuring plan that was announced like two days ago. So under the new plan the USD 260 billion conglomerate will be split into six business units. And Alibaba itself will become the holding company.

And they will let the six units go on public separately. And Alibaba will decide over time whether to maintain the control with six business units. This is essentially decentralizing the Alibaba group's operations, which helps the government-- in a way, allays the concerns about monopoly concerns on the part of Chinese regulators.

And this is quite important, because for the first time in Chinese capitalism history we see such a major restructuring of a tech giant. So people are eager to find out if this can provide some kind of template for other tech companies.

JULIANNA NEEDHAM: And so where will Jack Ma fit into the new Alibaba?

PERRIS LEE: OK, so pretty much Jack Ma will let the six business units have their own boards, have their own CEOs. So he will basically essentially take a step back, you know. So he wants to oversee the empire, for sure. But he will not be as involved as he was in the daily operations or strategies of the six units.

JULIANNA NEEDHAM: Great, Perris, good to chat. Thanks very much. That was Perris Lee, ECM Asia editorial and insights director.

Thanks for listening to this episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You'll find us on Apple podcasts, Spotify or look out for your Mergermarket news alert. For more information about what we've been discussing, have a look at the show notes. Join us again next week.