We have experts on the ground in China who are watching the market and guiding clients. In our regular updates on China's regulations and laws, we look at selected shifts and trends and share their insights.
In our latest PRC Regulatory Update, we look at how China is opening its capital markets. Read on for more.
China’s capital markets are developing – what you need to know about the latest changes
Over the past month, China’s regulator has released two significant reforms affecting the domestic and overseas securities offering and listing and all of the market participants. Both are part of China’s commitment to further open and reform its capital markets. The first involves significant changes to listing rules, in a market-wide roll-out that replaces the approval-based system. The second brings new rules and regulations for foreign listings by Chinese companies aim to provide more support and resources to growing companies. Here are our insights on the two changes.
Landmark reform of China’s capital market as China shifts towards registration-based securities offerings for all market segments
The China Securities Regulatory Commission (CSRC) has announced the full implementation of registration-based public offerings in China’s capital market, which become effective on February 17, 2023. The rules and regulations mark a significant reform of various aspects of China’s capital market and overhaul of the existing approval-based system. They finalize the long tested registration-based public offerings through extension of the registration-based mechanism to the entire capital market and all types of public offerings.
The newly released set of rules and regulations consists of 165 documents, covering various aspects such as preconditions for offerings, registration procedures, sponsoring and underwriting, material asset restructuring (MAR), regulatory enforcement and investor protection. The main features include:
1. Streamlining and optimizing preconditions for offerings. Information disclosure will sit as the cornerstone. Various preconditions and substantive tests for offerings under the approval-based mechanism will be transformed into disclosure requirements as far as possible. Different stock exchanges and markets should have diversified and different requirements to be more inclusive.
2. Improving the procedures for offerings. Review and approval by stock exchanges and registration through the CSRC should each have their own focus, but the process should be coherent and interconnected. In addition, the stock exchanges and the CSRC should have clear division of responsibilities to improve the efficiency and predictability of the offering process.
3. Optimizing the underwriting mechanism. There should not be administrative restrictions on offering price and size; instead, market participants, in particular, institutional investors should dictate the book-building, pricing and placement process.
4. Improving the mechanism of the MAR. Registration-based mechanism should be used for the purchase of assets by issuing shares by listed companies in each market segment. This includes improving the standards and pricing mechanism for the MAR, and strengthening the supervision during and after the MAR.
5. Strengthening regulatory enforcement and investor protection. Crackdown on illegal activities in the offering, sponsoring and underwriting process. Refine the system for mandatory buybacks.
New overseas offering and listing rules for Chinese companies
New regulations for the filing-based system for domestic companies that list and offer securities overseas were released by CSRC on March 31, 2023. This includes the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (Trial Measures) and five supporting guidelines.
The Trial Measures will provide stronger support for Chinese companies to list and offer securities in overseas markets, allowing them to utilize both domestic and overseas capital and market resources for further growth. Across six chapters and 35 articles, the Trial Measures:
1. Reform the existing regulatory framework by subjecting both direct and indirect overseas offerings and listing activities to a unified filing-based system, and clearly defines the scope under which the Trial Measures will apply.
2. Provide clarity on the filing process by specifying requirements on filing entities, timing and procedures.
3. Strengthen collaboration and coordination among different regulatory bodies, improves cross-border regulatory cooperation arrangements and creates a filing information sharing mechanism.
4. Define legal liabilities for failing to follow filing procedures, fabricating filing documents or other violations, and increases the cost for offenders.
5. Strengthen the inclusiveness of the current system:
- To meet the market demands and need for further opening-up of the capital market, it relaxes investor eligibility requirements for overseas direct offerings of domestic companies under certain circumstances.
- It further facilitates “full circulation” arrangements.
- It eases currency restrictions for overseas fund raising and dividend payment, in order to meet demand of raising RMB funds overseas.
The supporting guidelines give further clarity and detail on filing procedures for the Trial Measures, including on the applicability of regulations, content and format of filing documents, content required for reporting, communications around filing, and filing by overseas securities companies.
