Shanghai suspends key approval on route to offshore listings

Shanghai

OFFICIALS in China's financial capital of Shanghai are closing a route used for decades by companies operating in the technology sector to draw foreign investment.

Startups that have recently applied to Shanghai's National Development and Reform Commission for permission to inject money into affiliated entities incorporated in places like the Cayman Islands are being turned away, according to people familiar with the matter.

Such outbound direct investment is one common way Chinese companies have established and then put money into so-called variable interest entity (VIE) structures - a process used to attract foreign investment and list overseas.

Firms that approached Shanghai's NDRC are being told the process for outbound investment into VIE structures is being halted, the people said, asking not to be named speaking on a sensitive issue. The changes follow a directive from Beijing, one person said.

China is moving to plug regulatory gaps that for decades allowed technology giants like Alibaba Group Holding and Tencent Holdings to sidestep restrictions on foreign investment. In July, regulators proposed rules that would require nearly all companies seeking to list in foreign countries to undergo a cybersecurity review.

Shanghai's Municipal Development and Reform Commission said in a statement that it has not rejected requests for outbound direct investment by companies because of their use of VIEs. The policy of approving and registering overseas investment projects has been kept constant and steady in recent years, the Shanghai unit of the NDRC said on Monday through the News department of the city's foreign affairs office.

Chinese startups have been grappling with a flurry of regulatory changes targeting online companies in finance, education, ride-hailing, e-commerce and more. Regulators are discussing tougher oversight of VIEs nationwide, though the rules have yet to be finalised, the people said. It's unclear what these will mean for existing VIEs, many of which trade on exchanges in Hong Kong and New York.

Offshore listings came under scrutiny after Didi Global Inc forged ahead with its US float despite objections from officials worried about data leaks and national security.

The Nasdaq Golden Dragon China Index - which tracks some of China's biggest firms listed in the US - dropped 0.4 per cent on Friday, taking the year's decline to 25 per cent. BLOOMBERG