China has tightened up regulations for data-heavy tech companies planning to list overseas, in a bid to curb a mounting wave of cross-border Chinese initial public offerings (IPOs) and add a new screening mechanism for local firms willing to establish a footprint outside the country. 

The Cyberspace Administration of China (CAC), the country’s internet regulator, said on July 10 that Chinese companies with data of more than one million users will need to undergo a security review before listing on foreign stock exchanges, following its probe into ride-hailing app Didi after its attempted IPO in New York in June.

Winston Ma, former head of North America at China Investment Corporation, tells fDi that if the final data review ruling from CAC only applies to “overseas listings” and not “offshore listings”, it may well lead to more Chinese companies redirecting attention from the US to Hong Kong to launch IPOs.

The announcement of tighter regulation came in the wake of a bumper half-year for Chinese companies listing on US exchanges. Some 34 Chinese companies, from the retail, transport and technology sectors, raised a record $12.5bn on US exchanges over the first two quarters of 2021, according to Refintiv data, with $8.1bn raised in Q2 alone.

Veto power

Rory Green, China economist at TS Lombard, says that this gives the regulator a “veto” power over future non-China/non-Hong Kong IPOs.

“I think this is a sort of catalyst [for] China to look at [cross-border IPOs] like a screening mechanism,” Mr Green says. “It’s not outbound Chinese investment, but it is going out from China and they want to make sure it’s safe and there’s no undue leverage from foreign powers over these Chinese companies”.

China has been no stranger to screening inbound foreign investment. In December 2020, China’s National Development and Reform Commission announced new details for foreign investment screening on the basis of national security. 

More broadly, FDI screening mechanisms have peaked over the course of the pandemic, but it seemed that cross-border IPOs, whereby growing businesses look overseas for deeper capital markets, were spared the protectionism curse. 

According to Unctad and Refinitiv data, cross-border IPOs reached more than $16bn in Q1 2021, having doubled from the previous quarter.

Data geopolitics 

National government concerns over cybersecurity involving Chinese businesses and investments have been growing more pronounced over the past few years. Most notably, under Donald Trump’s administration, telecommunications giant Huawei was targeted over its 5G expansion and put on an “entity list” alongside other Chinese companies. 

In 2019, the US government also forced the sale of dating app Grindr from its then Chinese owners. Last year, India’s government banned the use of 59 Chinese apps, including TikTok.

But in future, such concerns may well play out without China whatsoever, Mr Green says, who expects this to become a prominent geopolitical issue as the internet moves from an “unregulated ‘growth-at all costs’ model” to private companies being regulated by nation states, “like utilities or public service providers”.

“I do think the rest of the world is going to catch up with China, particularly the EU,” he says. “They’re doing quite well with the General Data Protection Regulation, and they don’t have their own tech champions to worry about.”

Meanwhile, Joe Biden’s administration is currently drafting a digital trade agreement with countries in the Indo-Pacific to serve as a bulwark against China’s regional influence, sources told Bloomberg earlier this month. China’s Ministry of Commerce has also recently published guidelines for local companies on overseas investment in the digital economy.

This trend towards data sovereignty is a far cry from former US president Bill Clinton’s remark in the early 2000s that China’s Great Firewall project to ringfence the internet was a Sisyphean task. “Good luck! That’s sort of like trying to nail Jell-O to the wall,” he quipped.

As more regulation is drafted over cybersecurity and technology companies, governments everywhere may well start resourcing their own Jell-O and nails.