A look at Chinese Securities Regulatory Commission’s message regarding the recent market volatility
The end of July brings with it an effort from the China Securities Regulatory Commission (CSRC) to assuage fears among foreign investors. This comes after a series of regulatory actions that drove up concerns about Beijing rejecting foreign capital.
A rejection of foreign capital would not only affect the foreign investors but would also impact Chinese firms that were looking to list overseas to raise capital. These concerns have been brewing for months. Here is a look at the key factors that have led to this recent statement by CSRC.
Why do Chinese companies list in the US?
Across the world, companies are vying to list in the US, Chinese companies are no exception. The total market capitalization of the US financial market as of July 2021, is US$46,994,123 million. In 2020, Chinese firms raised US$13.6 billion from US listings. The US financial market is the biggest in the world and has a greater turnover than any other market.
The US financial market also gives priority to company earnings. Thus, a company listing in the US might find it easier to achieve a high valuation and sell more shares. In a study conducted by the US Federal Reserve, listing in the US approximately doubles the holding of a company’s shares. Because of this, the benefits of listing in the US are hard to overlook.
In the first half of 2021, Chinese firms have raised US$12.5 billion from 34 listings. The ride sharing company Didi, which was listed in June 2021, raised US$4.4 billion in its initial public offering. Didi has sold nearly 316 million shares as opposed to the planned 288 million. The company’s success in the American stock market is a testament to how important US listings are to Chinese firms.
The anxiety of foreign investors
Many investors from the US are stakeholders in Chinese companies. These companies are listed in the US through cross border stock listing. Cross border stock listing allows companies to trade on the stock market of both their home country and abroad. Within the past month many companies listed on the US stock exchange, such as Alibaba, Didi and Tencent have come under scrutiny.
In early July, the State Council made a statement that the rules of overseas listing may be updated, while it will also tighten restrictions on cross-border data flows and security. Around the same time, Didi came under fire for alleged mishandling of sensitive user data.
These events were stirring up concerns among foreign investors. However, the recent ban on private tutoring in the past week has pushed the investor concern over the edge.
Ban on private tutoring
On July 25, the Chinese government banned for-profit tutoring firms, which is a US$100 billion industry in the country. This ban came into effect to ensure the complete implementation of the education policy that strives to cultivate people’s talents with all-around development of morality, intelligence and physical health. This ban is also meant to protect parents from the burden of excessive tutoring fees.
While beneficial for the students and parents, it may adversely affect the tutoring firms. Shenzhen-listed Doushen Beijing Education & Technology and Dongguan Kingsun Optoelectronic said they expect a negative impact from the policy, since tutoring makes up a large part of their businesses.
What worsened the fears of foreign investors was speculation that the US might restrict investments in China and Hong Kong. This led to a direct impact on the China’s stocks. The Hang Seng Tech Index, which gauges many Hong Kong-listed Chinese stocks, plunged as much as 10%. Chinese currency Yuan also fell by 0.6%.
Addressing concerns with a direct statement
China stepped up to soothe the nerves of anxious investors by directly addressing all the concerned parties. On July 28, the CSRC held a call with global investors, Wall Street banks and Chinese financial groups. The call was reportedly attended by 12 executives from BlackRock, Fidelity, Goldman Sachs and JPMorgan.
During the call, CSRC’s Vice-chair Fang Xinghai assured the foreign investors that China will continue to allow Chinese companies to go public in the US as long as they meet the Chinese listing requirements. Xinghai went on to affirm that the aforementioned regulatory action was an isolated incidents.
Addressing concerns of Chinese financial groups, Xinghai mentioned that CSRC recognized that cross-border stock listings are a vital step in attracting foreign capital. He confirmed that the legal framework for cross border listings would be adjusted only if there were any national security concerns.
The call has had a positive impact on investor sentiment. By mid-day on July 29, China’s blue-chip CSI300 Index gained 1.4%. Other prominent indexes such as the Shanghai Composite Index rose by 1% and the Hang Seng Index jumped by 2.7%
Header image courtesy of Bloomberg