China avoiding US markets? Fewer homegrown firms now going for IPO on NY stock exchanges

Chinese market regulator is swiftly moving to rein in listings of smaller Chinese firms on New York stock exchanges. In the first half of 2024, the China Securities Regulatory Commission (CSRC) had approved US initial public offering (IPO) applications of 22 firms. However, since June, only 11 firms have been given a go ahead.

Financial Times quoted people close to the Chinese regulator as saying that the CSRC was imposing “tighter control” over concerns of manipulation and price-rigging. The CSRC is reportedly thwarting offshore listing of firms with small capitalisation and weak fundamentals.

“Not only the Chinese regulators but also other market participants   questioned why these firms require offshore listings,” the FT quoted a source as saying.

Concerns raised by Chinese regulator

According to the FT report, a record number of Chinese firms got listed on US stock exchanges in 2024. Public records show 61 Chinese firms floated their stocks on US stock exchanges last year, considerably up from 37 in 2023.

However, their participation in US markets was marred by allegations of pump-and-dump schemes, prompting even US regulators to issue warnings and advisories to investors.

According to experts, China is now acting to ensure its reputation in international market remains intact and doesn’t get harmed.

Andrew Collier, a researcher at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, was quoted by FT as saying: “It also doesn’t want to be embarrassed about the high volatility in stock prices that may undermine its image internationally at a time of slowing growth and shrinking foreign direct investment at home.”

Pump-and-dump risks

US investors suffered heavy losses in 2022 after a small Hong Kong brokerage called Magic Empire Global soared to 60 times its IPO value and then crashed a whopping 95 per cent. This wild price fluctuation happened within the first week of its listing.

This led the US regulator to tighten scrutiny of Chinese firms and even suspension of several listings. A report by Hindenburg Research released in January showed that more than 120 Chinese stocks reported massive irregular pricing following their US listing since 2022.

The FT report also highlighted that Chinese authorities were pushing large-cap mainland-listed companies to pursue secondary listings in Hong Kong this year.

(With inputs from agencies)