Some China Assets Can List in U.S. Unobstructed Amid Geopolitical Divide

Original Article Published on Caixin Global

The Takeaway: Chinese government policies had soured U.S. investors on Chinese companies before President Biden banned investments in certain high-tech sectors. But there are opportunities for common ground in sectors like energy.

For more than two decades, global limited partners (LPs) and their China-based U.S. dollar-denominated fund managers flourished, as they relied heavily on U.S. IPOs to exit their investments in China. However, this trend, marked by significant LP commitments and high-profile U.S. listings of Chinese tech firms, was upended in 2021.

Since July 2021, the presence of Chinese tech companies in the U.S. IPO market has all but vanished due to geopolitical tensions and a shift in Beijing’s regulatory stance, making overseas listings harder and a riskier prospect for investors. Both the LPs and China funds were forced to seek alternative ways to exit investments. However, for China-domiciled assets, this is a difficult endeavor.

The answer lies offshore: Companies relocating their operations outside of China can find a much smoother route to U.S. capital.

De-globalization

The rise of globalization, especially following China’s entry into the World Trade Organization in 2001, has been critical to understanding foreign investment in China. Through globalization, international trade connected China’s manufacturing might with the world, and foreign capital linked China’s burgeoning private sector with global capital markets.

Globalization for the U.S., while fruitful, has also created new socioeconomic challenges, such as the hollowing out of domestic manufacturing. Globalization for China, while also beneficial, was derailed in 2018 when the Trump administration initiated a trade war, triggering a downward spiral in China-U.S. relations. With supply chain vulnerabilities exposed during the Covid pandemic, growing concern about overdependence on China led to a decoupling movement.

Since then, relations have been bumpy. In August, President Biden announced restrictions on U.S. investment in certain Chinese tech sectors. In December, uncertainties surrounding the U.S.-China Agreement on Cooperation in Science and Technology surfaced for the first time since the pact was signed in 1979. This year, the U.S. is on track to import less from China than from Mexico for the first time since 2009. 

Similarly, China’s relationship with the European Union has soured. Trade tensions mounted as the EU’s trade deficit with China reached nearly 400 billion euros ($422 billion) in 2022, and disputes emerged as the bloc launched an investigation into Chinese subsidies of electric vehicles.

These shifts against globalization have prompted a localization of business operations and investment geographies. Global investment is now as much about geopolitics and local economies as it is about financial returns.

For global investors, growing geopolitical risks have not only impacted where their future investments will be, but also how those investments can be exited. 

China’s U.S. IPOs dry up

Since 2021, two unprecedented regulations on overseas IPOs have caused many Chinese tech companies to suspend U.S. listing plans. Although Beijing’s regulatory upheaval appears to be the main impediment to overseas IPOs, the true undercurrent redirecting exit pathways is geopolitics.

First is cybersecurity review, which requires Chinese companies with more than 1 million users to undergo a review before submitting confidential U.S. IPO filings. These reviews serve as safeguards for personal information privacy, a core facet of China’s national security. Social media giants like ByteDance and Xiaohongshu face greater scrutiny, requiring approval from China’s top leaders.

Second, registration with the China Securities Regulatory Commission (CSRC), is required for all overseas listings. Applicants must submit documents within three days of filing with foreign stock exchanges. Additional approvals from relevant ministries are also required, but many of them lack experience with overseas IPOs, delaying the registration process. Under the registration requirement, which went into effect in March, only a select few companies have completed CSRC registration for U.S. listings.

Beijing has reiterated its support for overseas listings, but the sometimes protracted registration process continues to erode investor confidence. Some global investors believe these rules are targeted at them, reflecting Beijing’s continued reluctance to reform and disdain for foreign capital, despite overt appeals by China for foreign investment. To dispel the doubts of global investors, Beijing must act quickly and decisively by expediting registration and enacting reforms. 

U.S. resistance

U.S. lawmakers have become increasingly vocal in keeping Chinese companies from accessing American capital.

The most notable example was a dispute between the U.S. Public Company Accounting Oversight Board and Beijing about oversight into Chinese auditors’ audit work papers. The dispute threatened the potential delisting of Chinese stocks from U.S. exchanges. It was finally resolved after nearly two years with Beijing granting full access.

A more recent example is Shein, a Chinese fast-fashion giant. In April, the U.S.-China Economic and Security Review Commission pressed lawmakers to ensure Shein complied with trade restrictions and intellectual property laws. This scrutiny intensified in May, with 24 legislators urging Securities and Exchange Commission (SEC) Chairman Gary Gensler to shelve Shein’s U.S. IPO eligibility until assurances against forced labor were obtained. In August, attorneys general from 16 U.S. states further challenged the SEC on this issue.

Such complications have prompted global investors to seek alternative exits for their Chinese assets through China’s A-share market or the Hong Kong market.

Slim hope for domestic listings

China’s domestic A-share market is beholden to Beijing’s development agenda, which guides CSRC directives to favor deep tech companies. This is yet another example of Beijing aiming for self-reliance due to growing geopolitical tensions.

However, on Aug. 27, the CSRC announced it would tighten A-share IPO approval. The Shanghai and Shenzhen stock exchanges started processing zero IPO applications in October and November.

Hong Kong’s market, despite being more globally integrated, carries greater exposure to geopolitical risks and has longstanding constraints around liquidity. Thus, it has never been the preferred choice for Chinese tech firms seeking overseas IPOs.

Ultimately, U.S. IPOs remain the preferred exit for foreign LPs and China’s U.S. dollar funds given the U.S. market’s high liquidity, low trading costs, and dependable regulatory framework.

Which China assets can list in the U.S. unobstructed?

The answer lies in global assets with a China edge, of which there are many.

During the week of Nov. 12, a China U.S. dollar fund manager held its annual general meeting in Shanghai and rallied more than 150 of its portfolio startup founders to discuss the future of development. The unanimous response? Go global.

Chinese enterprises going global is an unprecedented opportunity unfolding in real time.

For global LPs, “long China” commitments are actually a reflection of their confidence in Chinese entrepreneurs. With the intensifying geopolitical rift, Chinese entrepreneurs are now going global. By establishing new operations based entirely offshore, these entrepreneurs are re-positioning their businesses to generate 100% of their revenue outside of China. In doing so, they are integrating into Western supply chains, evolving from foreign competitors into local collaborators.

And Chinese fund managers must follow suit. Rather than focusing on targets domiciled in China, they should expand their focus, supercharging non-China enterprises wielding China know-how. Sequoia China’s newly announced initiatives are designed to leverage the spillover opportunities.

The China playbook of the past 20 years is no longer yielding outsized returns. mandate, they will be disappointed when aspiring U.S. IPOs fail. In this context, LPs must consider the emerging global initiatives of Chinese businesses. These endeavors stand out in the current geopolitical divide, offering a notable advantage: a hassle-free route to U.S. IPOs insulating them from geopolitical risks and Beijing’s regulations.