A record number of companies are abandoning attempts to list on China’s answer to the Nasdaq, as regulators increase scrutiny of technology businesses after scuppering Ant Group’s $37bn initial public offering.
A Financial Times analysis of figures released by Shanghai’s Star Market, which was launched to fanfare in July 2019, shows a record 76 companies suspended their IPO applications in March, or more than double the previous month.
The flurry of cancellations pushes the total number of aborted attempts to list on Star to more than 180. In November, the month that Beijing pulled Ant’s listing due to concerns over its lending business, the total number of cancelled IPOs stood at just 12.
The cancellations could complicate China’s efforts to develop its onshore capital markets — long a policy priority for Beijing which has been made more urgent by a US law passed in December that could force Chinese groups to delist from Wall Street.
They also point to a U-turn by Chinese authorities, who had committed to a so-called registration-based system when Star launched with the personal backing of President Xi Jinping.
Under the system, companies could list quickly on Star as long as they submitted the necessary financial statements to the China Securities Regulatory Commission. But experts say the CSRC is now walking back that commitment.
“The Star [Market] was genuinely meant to be a step in the direction of reform — what’s happening now is most certainly not,” said Fraser Howie, an independent analyst and expert on Chinese finance. “That has to be a worry in that even in China’s financial space, which was becoming more open and more market-driven, some of that is rolling back.”
Investment bankers in China say that in the wake of Ant’s failed dual IPO on Star and in Hong Kong, which would have been the world’s largest, companies seeking to list on the former exchange are facing stricter regulatory demands.
One person directly familiar with the CSRC’s enforcement strategy said it was making “two steps backwards after three steps forward”. They warned that Star’s IPO slowdown could last until the end of 2021.
A Shenzhen-based investment banker, whose firm has had several Star IPOs suspended by the CSRC this year, said regulators now pepper companies with questions about how certain business metrics are calculated. Executives must also disclose all of their personal bank accounts and be ready to explain any transaction larger than Rmb30,000 ($4,600).
Zhejiang Qizhi Technology, a network security solution provider, withdrew its Star market IPO application in March after receiving 28 questions from regulators on topics including its fluctuating valuation and whether it was too dependent on its top five clients for revenue.
“The regulator has got down to the nitty-gritty these days,” the banker said, adding that the IPO review process was now so long that many companies required expanded teams of bankers. That “has significantly boosted listing costs, prompting many firms to walk away”.
The number of companies waiting to list in China has now risen to almost 2,300, according to market data provider East Money Information, a backlog that would take about four years to clear based on the pace of IPOs in 2020.
The increased scrutiny of IPOs also comes as official concerns grow that a flood of listings could suck liquidity out of China’s stock market, which has been a global laggard this year.
Beijing’s rising preference for listings by certain kinds of tech companies, such as those in strategically important areas — particularly semiconductors — could further narrow which listings get approved for Star IPOs, said Thomas Gatley, an analyst at consultancy Gavekal Dragonomics.
“They see there is less money available, and they really want it to go to places it needs to be,” he said.