In the latest move to tighten its grip on its sprawling technology sector, China will put in force new rules to increase its oversight over all plans by Chinese firms to list on overseas stock markets.
On February 15, the new rules come into effect, and platform companies with data on more than 1 million users are required to undergo a security review before listing their shares overseas, the Cyberspace Administration of China (CAC) said.
CAC said in a statement while reiterating a worry flagged in July 2021 when these changes were first proposed:
“With stock market listings there is a risk that key information infrastructure, core data, important data or a large amount of personal information could be impacted, controlled or maliciously used by foreign governments.”
To increase oversight of news providers that use the technology to disseminate information, the CAC said in a separate statement that on March 1 it would also implement new rules on the use of algorithm recommendation technology. In addition, the rules will give users the right to switch off the service if they choose.
Last year, both sets of rules were proposed and a large swath of companies such as TikTok owner ByteDance, e-commerce giant Alibaba Group (9988.HK), and many smaller players are expected to potentially be impacted.
ByteDance and Alibaba did not immediately respond to request for comment.
Amid a slew of regulatory changes in China over the past year that have dampened the appetite of firms to list overseas, the change comes although bankers anticipate the new rules will provide more clarity in 2022.
The rules were not specified by the CAC if they will apply to companies seeking listings in Hong Kong. However, lawyers and bankers said it appeared that Chinese companies with more than 1 million users seeking to list in the city would not be required to seek the cybersecurity review, based on the wording of the rules.
Asking not to be named as he was not permitted to speak to the media, one investment banker at a Western institution told Reuters:
“Hong Kong is being treated as part of China, offshore though not foreign market, and this paves the way for more deals to return to Hong Kong.”
In Hong Kong, after trading in negative territory for most of the session, the Hang Seng Index (.HSI) closed up 0.06% but the city’s tech index (.HSTECH) lost 1.04%. The operator of the Hong Kong stock exchange, Hong Kong Exchanges, and Clearing Ltd shares closed down 1.1%. Following the announcement, they fell as much as 2.4%.
Justin Tang, head of Asian research at investment adviser United First Partners in Singapore, said:
“If this is not retrospective then it would only affect listing aspirants and not companies already listed. Having said that, companies in the latter camp already have a lot on their minds.”
The planned changes were not specified whether they would be retrospective by the rules published on January 4.
Compared to the proposal made in July, the new rules appeared to have shrunk the scope of the companies likely to be affected by the changes, Alex Roberts, who tracks data policy at law firm Linklaters in Shanghai, said. He added:
“The most significant change in these cybersecurity review measures seems to be the narrowing of the review’s application to only critical information providers, data processors that may impact national security, or platform operators holding over 1 million individuals’ personal data.”
However, based on the rules, it was still not clear which types of companies would be affected. He added:
“This ambiguity will be a real concern for successful multi-channel businesses in China’s digital economy given the current uncertainty of the review process.”
After a series of recent moves by Chinese authorities to boost oversight of Chinese companies’ offshore listings, the CAC changes came in. In sensitive sectors such as internet news and publishing, China’s state planner will demand regulatory clearance for overseas Chinese listings, it said last week.
Companies wishing to list overseas are required by the China Securities Regulatory Commission (CSRC) to submit filings to the agency first for registration, under a system that also involves close coordination among various regulatory bodies, it said separately.