THE long reach of Chinese regulators is making it hard for certain companies in the world’s second-biggest economy to carry out transactions, leaving billions of US dollars worth of deals on the table.
Even with Beijing’s stimulus in September and subsequent rally in the stock market, 2024 is set to be the worst year in more than a decade for mergers and acquisitions (M&A), according to data compiled by Bloomberg. And while better than the lows of 2023, initial public offerings (IPOs) in Hong Kong have raised less than a fifth of the amount four years ago.
Obtaining regulatory approvals has become more difficult over the past few years, according to sources familiar with the matter, who asked not to be named discussing a sensitive topic.
High-profile companies including online fashion retailer Shein, TikTok owner ByteDance and financial services firm Ant Group have been trying to list for years, only to find themselves entangled in the regulatory weeds. Other deals such as China National Pharmaceutical Group’s take-private of China Traditional Chinese Medicine Holdings lapsed after failing to secure approval from regulators, leading to losses at hedge funds including Millennium Management and Athos Capital.
While there’s more transparency from approval to filing, “regulators have not easily surrendered their authority over companies seeking to list overseas”, said Shen Meng, a director at Beijing-based investment bank Chanson & Co. “These companies are large and their overseas listings could lead to local capital outflow and potentially harm the image of China’s capital markets.”
M&A deals involving state-owned enterprises raise regulatory concerns, Shen said, including issues of corruption, asset loss and overseas risks.
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“In the current climate of declining administrative efficiency, the M&A process is likely to become even more protracted,” he said.
M&A and IPOs
The laboured approval process can result in many months of uncertainty for investors, executives and investment bankers, even for deals that eventually get the green light, such as Ascendent Capital Partners’s US$1.66 billion takeover of US-listed Hollysys Automation Technologies earlier this year.
Then there are other significant uncertainties beyond regulatory requirements, not least the US election, China’s economy and wider geopolitical tensions.
At US$250 billion, the volume of deals involving firms in China this year is headed for the lowest since 2013, according to data compiled by Bloomberg.
The Hong Kong market has seen some positive momentum in the past couple of months, led by share sales from Midea Group, as well as Horizon Robotics and China Resources Beverage Holdings. Still, the roughly US$9 billion raised in Hong Kong IPOs this year compares with the almost US$52 billion raised in 2020, the data showed. Deal activity, in general, also pales against booming markets such as India and Japan, and to some extent Australia.
While the China Securities Regulatory Commission (CSRC) has accelerated its approval process, IPOs are generally taking longer than before in Hong Kong, traditionally one of the world’s busiest equity capital markets, said Richard Wang, a partner and head of China ECM at law firm Freshfields Bruckhaus Deringer.
“A listing applicant would have done comparatively well if it could obtain CSRC approval and complete its Hong Kong listing within six months of filing its application,” Wang said. “This has partially contributed to an increasing number of refiling cases in Hong Kong.”
Different regulators from the national level to local and sector-specific can be involved in approvals, and they often have varying requirements and questions, sometimes beyond written rules and procedures.
Other regulators that may get involved in the dealmaking approval process include the State-owned Assets Supervision and Administration Commission, the National Development and Reform Commission, the Ministry of Commerce and the State Administration of Foreign Exchange. The need for CSRC approval has also affected the listing plans of firms that agreed to merge with special-purpose acquisition companies in Hong Kong.
Representatives for the CSRC and other agencies did not immediately respond to requests seeking comment.
Didi did not
Didi Global’s experience three years ago still casts a shadow that’s not helping confidence.
The ride-hailing company delisted in New York less than a year after its US$4.4 billion IPO, in a resounding warning about going ahead with listings without final approval from Beijing. At the time of delisting, Didi said it would instead sell shares in Hong Kong. Years later there’s no sign of that, with Chinese authorities yet to approve any new plan, Bloomberg News reported.
“The case of Didi made it clear that Chinese firms cannot list overseas if the CSRC objects,” said Yiming Qian, a professor who does research on corporate finance at the University of Connecticut. “It is also understood that CSRC has authority over firms registered in or conducting business in China.”
Following the Didi saga, China rolled out a series of rules for companies seeking overseas IPOs. The system requires ministries of the State Council to appraise applicants operating in industries within their purviews. Their opinions can be impactful enough to sway or overturn the listing plans of an entire industry.
Beyond the economic stimulus package in September, the Chinese government has been issuing guidelines on deepening reforms for M&A among listed companies and urging brokerages to play an active role in deals. Premier Li Qiang has also called for measures to promote venture investments and support qualified technology firms listing overseas.
WeRide and Zeekr Intelligent Technology Holding have been able to list in the US this year. Others planning to include autonomous-driving startup Pony.ai.
Mixed signals
Regulatory and policy risks persist, particularly for smaller launches, Bloomberg Intelligence analysts Lu Yeung and Breanne Dougherty wrote in an Oct 9 note.
Kayou, a Chinese maker of trading cards and stationery with animation themes, has pushed back its plan for an IPO in Hong Kong because it has not received approval to list from China’s securities regulator, Bloomberg News has reported.
China has also this year imposed stricter controls in its “Nine-Point Guideline” to strengthen domestic capital markets over the next decade, including improving the quality of IPOs. Meanwhile, offshore listings of several beverage chains have been suspended and sectors including education and apparel placed on so-called red and yellow light lists.
“There have been mixed signals,” said Albert Kwok, an emerging-markets portfolio manager at Jennison Associates in Boston. “On one hand you see that certain regulatory bodies wanted to ease, and then you see certain regulatory bodies putting in policy tightening.”
That’s the sort of thing that can cloud investors’ decision making, Kwok said. BLOOMBERG
