China puts brakes on US stock listings for homegrown companies

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China’s securities regulator has clamped down on small companies’ listings on New York stock exchanges after many of them became vehicles for price-rigging, causing heavy losses for US investors.

The rate of China-approved applications for US initial public offerings has slowed noticeably in the past year, falling from 22 in the first half of 2024 to 11 since June. Four people close to the China Securities Regulatory Commission said it intends to impose “tighter control” this year over US IPOs of Chinese companies with small capitalisation and weak fundamentals, viewing them as prone to market manipulation.

The CSRC was concerned about whether these small-cap companies listed in the US truly need to raise funds. “Not only the Chinese regulators but also other market participants have questioned why these firms require offshore listings,” said a person familiar with the CSRC’s latest thinking.

The regulator did not respond to requests for comment.

China has tightened regulations on offshore capital raising since 2021, following the introduction of new rules on cross-border cyber security and data security, which have also complicated the application process for companies seeking offshore listings.

A record number of Chinese companies went public on US stock exchanges last year, attended by increasing allegations of pump-and-dump schemes and warnings from US regulators to tread cautiously with the investments.

Analysts said the crackdown is Beijing’s latest effort to reduce financial ties with the US amid geopolitical tensions and underscores concerns over excessive speculation on New York-listed Chinese stocks.

“China doesn’t want more participation in the US capital markets,” said Andrew Collier, a researcher at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School. “It also doesn’t want to be embarrassed about the high volatility in stock prices that may undermine its image internationally at a time of slowing growth and shrinking foreign direct investment at home.”

The latest regulatory tightening follows a surge in Chinese IPOs on US exchanges as Beijing tightened control over domestic listings. Public records show 61 Chinese companies floated shares in the US past year, up from 37 in 2023. The number of IPOs on China’s local bourses fell more than two-thirds over the same period.

The US listing boom of Chinese stocks came as many of them, especially small ones, had in recent years reported wild price swings that sparked concerns over manipulation.

In 2022, shares of a small Hong Kong brokerage called Magic Empire Global surged to 60 times their offering price before losing 95 per cent of their value — all within the first week of its IPO. Magic Empire did not respond to requests for comment.

Following that, Nasdaq suspended listings of several small Chinese companies and warned investors about pump-and-dump risks.

According to a study released in January by Hindenburg Research, a now-shuttered investment research company, 128 Chinese companies have reported irregular price activity not explained by corporate fundamentals shortly after their New York IPOs since 2022.

US regulators, led by the Securities and Exchange Commission, have in recent years issued multiple warnings about pump and dump schemes involving small Chinese companies listed in New York.

In a report last month, the Financial Industry Regulatory Authority said such scams began to happen not only during the IPO but also weeks or even months afterwards.

“A lot of US-listed Chinese companies are too small to be included in the portfolio of institutional investors,” said Tian Hou, chief executive of TH Capital, a New York-based asset manager that invests in Chinese equities, “that makes these stocks an easy target for manipulation as it doesn’t cost a lot of money to drive prices up and down”.

China’s stock regulator was aware of the problem and sought to resolve it by raising the bar for local companies’ US listings. The CSRC is spending at least twice as much time as it did a year ago reviewing US listing requests from Chinese companies, led by those with plans to raise $10mn or less, according to bankers and lawyers.

The CSRC’s increased scrutiny has included more questions for IPO applicants ranging from whether stock option programmes may create insider trading to how user data will be protected.

IPO lawyers and bankers said it could take up to a year for clients to get CSRC approval to list in the US. That compared with less than two months a year ago.

“CSRC has been making many more comments on Chinese companies’ US IPO applications to the point that it may take issues where the SEC doesn’t see a problem,” said Pang Zhang-Whitaker, a New York-based partner at law firm Carter Ledyard & Milburn who works with Chinese companies on US listings.

Meanwhile, Chinese authorities are pushing more large-cap mainland-listed companies to pursue secondary listings in Hong Kong this year.

The shift could potentially lead to a revival in listings worth $20bn in Hong Kong, led by world’s largest battery maker CATL, marking a possible sharp pick-up in fundraising activities of the city in 2025.

The regulatory tightening looks set to continue this year.

“There is not enough upside to raising money in the US for China’s overall interest,” said Collier of the Harvard Kennedy School. “The downside risk is much bigger than the upside.”