China reportedly weighs ban on U.S. IPOs from domestic tech companies with sensitive data

Investors will see an electric screen in a stock exchange hall on February 18, 2021 in Shanghai, China, displaying stock price data.

VCG | Visual China Group | Getty Images

Beijing has envisaged new rules that would prevent domestic Internet companies from going public in the US, the Wall Street Journal reported on Friday.

Chinese regulators target technology companies specifically with user-related data, and companies that are less data-heavy, such as pharmaceuticals, could be isolated from the IPO ban, the Journal reported, citing people familiar with the matter.

Alibaba’s shares fell nearly 3% in early Friday trading after losing 15% this month alone. Invesco Golden Dragon China ETF (PGJ), which tracks US-listed Chinese stocks consisting of ADRs from companies based in mainland China, lost 26% this quarter due to increased regulatory pressure.

The new rules have not yet been finalized and Beijing plans to implement them in the fourth quarter, the Journal reported.

Earlier this week, China’s cybersecurity regulator set two aspects of regulation that companies wanting to go public must comply with – national laws and regulations, and ensuring the security of the national network, “critical information infrastructure” and the personal data.

Those industries with critical data include public communications and information services, energy, transportation, waterworks, finance, and public services, regulators said earlier.

Beijing is already cracking down on industries from technology to education to gaming, while tightening restrictions on cross-border data flow and security. The government has persecuted some of China’s most powerful corporations, including Didi, Alibaba, and Tencent.

Meanwhile, the Securities and Exchange Commission has stepped up its oversight of Chinese companies targeting US stock exchanges. The agency said it will require additional disclosures from the Chinese government about the company’s structure and the risk of future action.

The so-called Variable Interest Entities are a structure used by large Chinese companies from Alibaba to JD.com to go public in the US while bypassing Beijing’s oversight, as the country is not a direct one in most cases foreign ownership permits.

These variable ownership companies allow China-based operating companies to set up offshore shell companies in a different jurisdiction and issue shares to public shareholders.

– Click here to read the original Wall Street Journal story.

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