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In the past year, a quiet but important change has taken place in the way Wall Street’s biggest banks take Chinese companies public. When they warn investors about risks, they are being more careful not to upset Beijing.
The change centres on what might seem an unlikely setting for a political tussle: prospectus documents for overseas initial public offerings. In these documents, issuers typically detail potential risk factors for investors at length — often in stark terms to fend off lawsuits if things go awry.
Since China’s technology and education crackdowns wiped huge sums from the value of internationally listed companies, it is not a small matter.
When the pharmaceuticals group Wuxi Biologics listed in Hong Kong in 2017, a deal that Bank of America and Morgan Stanley worked on, its prospectus used language that could be deemed critical of China. It warned it might be “impossible” to comply strictly with some Chinese regulators’ demands because they “may not be consistently applied by other government authorities”. It said China’s legal system “is based in part on government policies and administrative rules that may have a retroactive effect”, meaning “we may not be aware of our violations of these policies and rules until some time after the violation” — language also used by other Chinese companies in prospectuses such as Xpeng, Li Auto, Asymchem and Tianqi Lithium in 2021 and 2022.
But by the time Wuxi XDC — a unit spun off from Wuxi — listed in Hong Kong in November, that type of language was no longer in favour. The parallel section of the Wuxi XDC prospectus, which names Morgan Stanley, Goldman Sachs and JPMorgan as sponsors, instead told investors that China’s laws and regulations were “continually evolving” and “we cannot foresee how [they] will be interpreted and enforced”.
The shift in tone may seem nuanced but it is not accidental. Beijing introduced new rules last year, banning banks from including in the filings “any comments in a manner that misrepresents or disparages laws and policies, [the] business environment and judicial situation of the state”. Soon after the new rules took effect, Hong Kong’s stock exchange also repealed a requirement for Chinese companies listing in the territory to include a China-specific “risk factors” section — though companies still have to disclose “material or specific risks”.
In Hong Kong listings, “the risk factors will generally go in the direction of what [China’s regulator] regards as being acceptable — which is going to be slimmed down considerably,” a senior banker said. In practice, changes are sometimes subtle. Some have replaced the boilerplate phrase “risks related to doing business in China” with vaguer language on risks such as “in the country where we operate” or “in the principal place of our business”.
Delivery group J&T Global Express, which was advised by Morgan Stanley, Bank of America, CICC and UBS in its IPO, avoids naming China in a section that says “many of the legal systems in our markets are based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect”. The company operates around south-east Asia as well as China.
Contrast that with the more direct language used for a US listing by Amer Sports, which is owned by a consortium led by China’s Anta. Many of the same banks — Goldman Sachs, Bank of America, JPMorgan, Morgan Stanley, Citi and UBS — are involved. It has not been through the Chinese regulatory approval process because it is not classed as a Chinese company, according to three people with knowledge of the matter, though Amer would not confirm this.
China “has recently published new policies that significantly affected certain industries”, said its prospectus this month. It added that it “cannot rule out the possibility that it will in the future release additional regulations or policies” affecting it.
Such divergence carries reputation risks for global banks. The SEC last year called for “more specific and prominent disclosure” of risks related to China’s government. Finding language that satisfies both Chinese and US regulators will not be easy. One big looming test will be the potential IPO of fast-fashion retailer Shein which is reported to be seeking Beijing approval for a US listing.
Many bankers acknowledge that the language of offering documents has been toned down. They say they are simply acting in line with local regulations. Others, however, complain that this raises further questions about Hong Kong. A frustrated financier put it this way: If US firms in the city can no longer put prospectus filings together without asking what will be deemed to disparage China, can Hong Kong still be classed as an international financial centre?
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