China IPO crackdown will cast chill over Caymans - Reuters

A driver of Chinese ride-hailing service Didi drives with a phone showing a navigation map on Didi's app, in Beijing, China July 5, 2021.

HONG KONG, July 7 (Reuters Breakingviews) - Dark clouds are gathering over popular Caribbean jurisdictions favoured by Chinese companies. An offshore corporate domicile has enabled the $60 billion Didi Global (DIDI.N) and peers to easily list in New York. But new guidance from the powerful state cabinet will tighten oversight on overseas floats.

Foreign investment restrictions into technology, healthcare and other sectors have led to some creative workarounds. Most companies, including titans like Alibaba (9988.HK), rely on a complex web of foreign and domestic structures known as variable interest entities. Recently-listed Didi, for example, is a Cayman Islands holding company backed by Japan’s SoftBank (9984.T) and others. It controls Chinese ride-hailing operations, which houses sensitive operating licenses that are off limits to foreigners, through legal contracts.

These now-common VIE arrangements have smoothed the path to New York. Usually, local companies have to go through a lengthy approval process to sell shares. But those that call the Cayman Islands or other foreign jurisdictions their corporate home fall outside the purview of Beijing. That loophole has fuelled a Chinese listings frenzy in the United States. Over the past decade, over 200 companies from the People’s Republic have raised $78 billion in New York, including Alibaba’s record $25 billion offering in 2014, according to Dealogic.

That will change. The General Office of the Communist Party and the State Council, the country’s highest echelons of power, on Tuesday unveiled sweeping new proposals targeting “illegal securities activities”. Details are scarce, but the document calls for new regulations for companies already listed overseas or are planning to do so. It’s the first time they have weighed in on such corporate matters.

The timing is notable. Didi went public just a week ago, ignoring suggestions from Chinese officials to delay its initial public offering, according to the Wall Street Journal. The company has since been hit with a cybersecurity investigation and app store bans, sending its shares down 20% on Tuesday. A clearer approval procedure for companies listing abroad using VIEs might prevent unhappy regulators from taking revenge on newly listed ones and their shareholders.

Over the longer term, though, companies that have relied on the Cayman Islands to escape Beijing’s reach will find it harder. Investment banks that earned massive fees welcoming Chinese visitors to New York will miss those sunny days too.

Follow @ywchen1 on Twitter

CONTEXT NEWS

- The Chinese government on July 6 issued new guidelines to step up supervision on Chinese companies listed abroad.

- Under the new measures, China will amend regulations on the overseas stock offering of Chinese joint stock companies, and formulate judicial interpretations and supporting rules for the extraterritorial application of the Securities Law, China's cabinet said in a statement.

- China will also improve regulation of cross-border data flows and security, crack down on illegal activity in the securities market and punish fraudulent securities issuance, market manipulation and insider trading. The country will check sources of funding for securities investment and control leverage ratios, it said.

- For previous columns by the author, Reuters customers can click on

Editing by Robyn Mak and Katrina Hamlin

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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China IPO crackdown will cast chill over Caymans - Reuters
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