Beijing's IPO Block

Thwarted from listing in China, companies could turn their attention to Hong Kong.

This month's National People's Congress meeting put a damper on the wave of China delistings from the U.S., as well as investor appetite for tech startups, in a way that a crashing Shanghai stock market didn't last year.

Two keenly anticipated measures that would have made doing an initial public offering in China easier weren't mentioned. One, reforms that would have done away with the need for regulators to vet share sales and two, the establishment of a bourse for startups. Shanghai's ``strategic emerging industries board'' was to have been an exchange for high-growth companies yet to turn a profit, sort of like a Chinese Nasdaq. The idea is that it would contain better-quality firms than Shenzhen's ChiNext, which is volatile by even China's standards:

Outsized Moves

Shenzhen's ChiNext index is more volatile than the Shanghai Composite, which is dominated by state-owned enterprises, or Hong Kong's Hang Seng

Source: Bloomberg data

That those two things look to have been put on the back-burner is bad news for China-listing hopefuls in general -- there are 700-odd companies currently in the IPO queue --- and especially bad news for all those companies leaving the U.S. via take-private transactions with the hopes of relisting at home where valuations are higher.

Since January last year, 42 U.S. publicly traded Chinese companies have announced plans to go private worth about $39 billion, according to data compiled by Bloomberg. So far, just seven have been completed. (The biggest -- the $9.3 billion buyout of Qihoo 360 Technology by management and Sequoia Capital's China arm -- isn't due to close until June.)

Don't Hold Me Back

Take private activity by Chinese companies listed in the U.S. has slowed since the second quarter of 2015

Source: Bloomberg data

That's a lot of disappointed businesses that now must be thinking they'll either have to get in line with those other 700, or perhaps find a shell company that's already listed they can back into. That option, however, isn't really appealing. For a start, finding a suitable shell company is difficult and with valuations where they are, it's also not cheap, as display advertising firm Focus Media learned.

China's unlisted tech stars, including online peer-to-peer lender Lufax and Alibaba's payment affiliate, Ant Financial, are also going to have a wait on their hands. Following Alibaba's record-breaking $25 billion share sale in New York in 2014, both have been touted as the next big thing in high-tech IPOs. But with most of its business coming from processing payments, Ant isn't allowed to accept foreign investors, so listing in the U.S. is out of the question. Without Shanghai's strategic emerging industries board, unprofitable Lufax can't list in China either, unless it plumps for ChiNext.

Outside of an interminable wait, there is one other option: Hong Kong. Its main board permits companies that aren't making money if they have sufficient revenue and cash flow and historically it's been one of the most active financial centers for IPOs globally. Investment bankers in the city should be rubbing their hands. Beijing's foot-dragging may still make one camp happy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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