It’s all aboard the US IPO train for Chinese firms this month. At least 10 filed in October, compared to just 23 finished listings during all of 2018. 19 Chinese firms have completed IPOs stateside this year to date.

Drone maker Ehang, podcast site Lizhi, and NetEase edtech arm Youdao are all among those that filed in October.

The US IPO boom came as China hoped to bring listings home with Nasdaq-style tech board the STAR Market, launched in July. The STAR Board, based at the Shanghai Stock Exchange, offers a number of concessions to attract tech companies to list domestically, including registration-based listing and allowing loss-making firms to list.

Bottom line: Politics matters, but businesses go where the money is. Beijing is trying to bring Chinese hi-tech listings home, while Washington is growing hostile to them. But uncertainty in Hong Kong seems to be driving firms to New York, not Shanghai.

An IPO every two business days: At least 10 Chinese tech companies filed IPOs in the US in October, and one went public in Hong Kong. 

  • Oct. 8:, a Chinese online real estate marketplace, files for Nasdaq IPO.
  • Oct 15: Gaming giant NetEase’s learning services and products unit Youdao updates its filing to the SEC for its listing on the New York Stock Exchange (NYSE), specifying a fundraise amount of up to $115.9 million.
  • Oct. 25: Chinese apartment rental platform Qingke, a rival to Danke Apartment, files an IPO to Nasdaq.
  • Oct. 28: Hangzhou-based Canaan, the world’s second-largest maker of bitcoin mining machines, files for a US IPO.
  • Oct. 28: Chinese online residential rental marketplace Danke Apartment files for IPO on NYSE.
  • Oct. 28: Chinese interactive podcast platform Lizhi applies to list in the US.
  • Oct. 28: Reuters reports that China’s homegrown version of WeWork, Ucommune, filed a prospectus with the US securities regulator in late September as it prepares to go public by the end of the year.
  • Oct. 31: Meiliche Financial, an online auto finance company, files (in Chinese) for IPO on NYSE.
  • Oct. 29: Shanghai-based I-Mab Biopharma files for Nasdaq IPO as it looks to accelerate its China-based drug commercialization process.
  • Oct. 31: Guangzhou-based drone maker Ehang files for IPO on Nasdaq.

Nasdaq Shanghai?: China’s STAR Market is a bid to make mainland capital markets friendlier to tech firms, borrowing a number of practices from US markets not previously seen in China. These include:

  • Registration-based IPOs allow companies, not regulators, to decide pricing and valuations. Other markets use an approval-based system in which stock regulator China Securities Regulatory Commission (CSRC) must vet every application, making it unpredictable for companies to list.
  • Allows companies that are not profitable to list.
  • Allows listings of companies with dual-class shares or weighted voting rights. These grant more power to certain shareholders like founders and high-ranking executives.
  • No limits on stock prices for the first five days of trading. One of the first companies debuted on the board saw its shares rose as much as 448% an hour after trading began. If the company had listed on the Shanghai Stock Exchange, it would have been capped at 20%.
  • Gives issuers and investors more control over the pricing and timing of IPOs.

US closing the door? The wave of filing followed reports that Nasdaq, a major destination for Chinese tech companies seeking US IPOs, changes its listing rules that require raised the average trading volume requirements for a stock in late September.

  • Ahead of the Nasdaq alteration, Reuters reported that the US President Donald Trump was considering ordering the delisting Chinese companies from US stock markets, triggering a tumble of shares of Chinese firms. 
  • The White House later clarified that delisting Chinese companies traded on US exchanges “is not on the table.”
  • The Trump administration, however, said it is pushing for greater transparency and compliance with a number of laws by Chinese filers for the sake of “US investor protection.”

Political factors: Politics have played more decisive roles in Chinese companies’ IPO plans in the past few months under the shadow of ongoing US-China trade conflicts.

  • A warm welcome in China—The STAR Market is part of China’s efforts to mobilize private capital into high-tech sectors, associated with Made in China 2025, the industrial policy at the center of the country’s trade dispute with the US.
  • And a cold shoulder from the White House—President Trump’s remarks on delisting Chinese companies were made days ahead before trade talks between the world’s largest two economies resume.
  • Situation too hot in Hong Kong—monthslong political turmoil in Hong Kong, another popular destination for Chinese firms seeking painless listings, has scared many of them off.
  • Artificial intelligence startup Megvii is reportedly considering a delay to its Hong Kong listing plans after the company was added to a US trade blacklist last month over alleged participation in human rights abuses in China’s Xinjiang region.

Why STAR flopped: As of Friday, some 50 companies are being traded on the STAR Market and 165 are on the pipeline, according to the board’s website (in Chinese). 

  • This is partially due to the painful auditing process that could last months that companies have to go through before they can successfully go public.
  • The sectors the STAR Market intends to aid also excluded internet companies, at least for now. The CSRC said in January that the STAR Market would “mainly serve” companies in high-tech and strategic emerging sectors such as new-generation information technology, advanced equipment, new materials and energy, and biomedicine.
  • The lock-up period, a predetermined amount of time following an IPO where particular shareholders are restricted from selling their shares, for controlling shareholders and actual controllers of a STAR Market-listed company is 36 months while that of ordinary shareholders is 12 months, according to Xinhua News Agency (in Chinese).
  • The lock-up period for US IPOs usually ranges from 90 to 180 days after the date of listing.

STAR board: A New Hope? The Wall Street Journal reported Thursday that China will “reboot” the STAR Market in a second bid to get companies interested. Changes predicted by the article include:

  • Lowering of the market-capitalization threshold for overseas-listed companies to RMB 100 billion (around $14.3 billion) or less, halving the threshold set last year.
  • Easing of capital controls for that hamper investors from moving their money abroad.
  • Under the new system, foreign companies and Chinese businesses that are incorporate abroad will be able to list on the STAR Market.
  • Reduced lock-up period for investors.

The mighty dollar: James Hull, professional investor and co-host of the China Tech Investor podcast (powered by TechNode), told TechNode that companies may be pushed by their investors to go to US markets. A Chinese listing means cashing out in renminbi—and potentially seeing your money stuck in China.

  • Strict foreign exchange controls make it difficult to move money out of China.
  • “If you are a tech investor, and you have invested in these companies, you would prefer to receive Hong Kong dollars or US dollars, because you can take that money and reinvest it anywhere in the world. Whereas if you list in the STAR Market, you will get Renminbi. And then you can reinvest it in China, but it’s harder to reinvest anywhere else,” said Hull.
  • From an investor’s perspective, Hull also attributes the preference of US markets to the higher liquidity there and the shorter lock-up period for investors to exit. 
  • “They [Chinese tech companies] might choose the US because they think there are more public market investors in the US who will understand their business. There are a lot of tech companies listed in the US and a lot of investors are familiar with technology in the US,” Hull added.

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