China's IPO Reforms Promise to Reignite VC-Backed Listings

Under this new system, the hope is that companies will be more easily able to list in mainland China.

PitchBook 05 June, 2023 | 16:44
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The number of venture-backed listings in China has fallen over the past few quarters, but recent reforms to the country's IPO system may encourage more offerings.

So far this year, 61 VC-backed Chinese companies have gone public, raising over $45 billion, according to PitchBook data. Some 39 listed in Q1, a decline of 22% from the previous quarter.

As in most parts of the world, IPO activity in China has been negatively impacted by volatility in the public markets. The country's ongoing tensions with the U.S. regarding national security and technology, as well as its recent "zero-COVID" policy, have also caused foreign investors to steer clear of its exchanges.

Historically, many Chinese companies, including e-commerce giant Alibaba Group (09988) and "super app" provider Baidu Inc (09888), have preferred to list in other countries, predominantly the U.S. But new IPO reforms may help lure tech companies back to China's exchanges.

Earlier this year, the China Securities Regulatory Commission (CSRC) adopted new measures and regulations for a registration-based IPO system that was implemented at the country's two largest stock exchanges: the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

Prior to the reform, these exchanges operated under an approval-based system, meaning that companies looking to list would have to receive approval from the CSRC. The regulator would conduct a thorough review of IPO applications, which would include financials, business plans, management and compliance, to judge whether a company should be allowed to list.

Under the new rules, which were implemented on the Shanghai STAR Market and the Beijing Stock Exchange in 2019 and 2021, respectively, approval is granted by the exchanges themselves rather than the regulator.

The CSRC will focus instead on a company's compliance with national laws and regulations. It will also no longer determine the price of shares, which will be up to the market, and the cap on IPO pricing designed to limit fluctuation in the first few days of trading has been removed.

Under this new system, the hope is that companies will be more easily able to list in mainland China. This could mean a significant increase in listings, but it is important to note that the threshold for listing on the Shanghai and Shenzhen stock exchanges is higher than that of smaller exchanges.

Following the implementation of the reforms, reports indicated that activity increased on both exchanges and that the first cohort to list under the new system saw significant increases in share prices.

VC-backed companies have yet to follow, which makes sense given investors' current lack of appetite for public tech companies. But when markets begin to recover, China may find more homegrown tech companies on its exchanges than in previous years.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alibaba Group Holding Ltd Ordinary Shares68.45 HKD-2.77Rating
Baidu Inc94.15 HKD-2.69Rating

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