China plans to ban U.S. listings for domestic tech firms with sensitive user data - WSJ

China is planning to introduce a new law to ban domestic tech firms from going public in the U.S., the Wall Street Journal reported on Friday, citing people familiar with the matter, further consolidating crackdown on industries to tighten restrictions on cross-border data flows and security.

Market regulators in Beijing are specifically targeting internet companies with large amounts of user-related sensitive data, as it had warned some of the companies and international investors, the report said.

However, the officials from the China Securities Regulatory Commission (CSRC) said that firms with less sensitive data, such as those in the pharmaceutical industry, are likely to receive approval for overseas IPO, sources told the Journal.

The new legislation will help the Chinese government to exert more control over corporations using business structures like Variable Interest Entity (VIE) that China’s biggest tech companies like Alibaba Group Holding Ltd, Didi Global Inc, and Tencent Holdings Ltd use to sidestep oversight from Beijing as the country does not allow direct foreign ownership in most cases.

A VIE is a type of legal business structure created in a way that even if an investor does not hold a majority of the voting rights, they can exercise a controlling interest in it to protect a business from legal action by its creditors.

It allows Chinese companies to establish offshore shell companies in a foreign jurisdiction and issue stocks to public shareholders.

Chinese leaders are planning to establish a mechanism that would require companies to obtain formal approval for foreign listings from a cross-ministry committee, which would include CSRC, Cyberspace Administration of China (CAC), and other ministries, to review data flow from sensitive sectors like the internet, telecom and education because of geopolitical and national-security concerns, the report said.

Shares of Alibaba fell nearly 3% in premarket trading on Friday after losing 15% this month alone. The Invesco Golden Dragon China ETF (PGJ), which tracks U.S.-listed Chinese shares consisting of ADRs of companies that are headquartered and incorporated in mainland China, has lost 26% this quarter amid the increased regulatory pressure.

Although the new law has not been finalized yet, the sources told WSJ that CSRC plans to implement them around the fourth quarter and have asked companies to hold off on overseas IPOs till it is implemented.

Earlier this week, CAC laid out two aspects of regulation that must be complied with by the Chinese firms planning for foreign listing. The companies from public communication and information services, energy, transportation, waterworks, finance, and public services sectors have to ensure the national laws and regulations and the security of the national network, “critical information infrastructure,” and personal data.

The sectors were reported as crtical infrastructure in which dysfunction or loss of data would endanger national security, the economy, people’s livelihoods, and the public interest.

Meanwhile, the U.S. Securities and Exchange Commission (SEC) has stepped up its oversight on Chinese firms seeking U.S. listings and said it would require disclosures about the corporate structure and any risk from future actions from the Chinese government.

Picture Credit: Lenher Investments