Just a few months after the bankers celebrated the record revenues of Chinese companies listed in New York and Hong Kong, they suddenly woke up. The transaction was shelved and investors suffered heavy losses.

China first hit its Uber-like Didi Global Company within a few days of its first listing in the United States, and the State Council quickly announced that it would conduct stricter reviews on all offshore listed companies. On Saturday, someone proposed to conduct cybersecurity reviews of companies with more than 1 million user data before seeking to list abroad.

The warning sign has been flashing for a while. As the underwriters received a record $1.5 billion in expenses last year by helping Chinese companies in overseas initial public offerings, Sino-US relations are at a low point. In December last year, Donald Trump signed a bill to delist Chinese companies that did not comply with audit inspection rules. At the same time, President Xi Jinping has strengthened supervision of large technology companies, in part to protect the treasure trove of data they control.

These actions jeopardized the frantic transactions that occurred during the pandemic, and since Alibaba Group Holdings Limited began trading in New York in 2014, the lucrative offshore listing business has brought about $6.4 billion in expenses. Morgan Stanley, Goldman Sachs and China International Finance Corporation topped the list during that time, when nearly 40% of fees came from US transactions.

Bankers are now saying that they expect most Chinese IPOs on US exchanges to be suspended or moved to other locations. Given the sharp drop in fees in Hong Kong, revenues this year are expected to be eaten away. The listing requirements for financial centers and mainland China are also stricter, and transactions are far from certain.

“There is some uncertainty, and it may take a month or two to take effect,” said David Chin, head of investment banking for Asia Pacific at UBS Group, speaking of China’s changing rules at a briefing last week. “In the end, China will find a solution because the United States has been very supportive of the development of Chinese Internet companies and subsequent financing.”

At the same time, the originally healthy IPO channels are weakening. One immediate victim was LinkDoc Technology Ltd., a Beijing-based medical data company, which stopped preparations for a US IPO on Thursday.

According to the British Financial Times, the fitness app Keep also chose not to conduct the planned US public filing. According to people familiar with the matter, the podcasting app Himalaya’s IPO in the US is also in a state of uncertainty. Other potentially questionable transactions include the potential $1 billion IPO of Hong Kong express company Lalamove.

According to data compiled by Bloomberg, China’s crackdown on overseas listings threatens a total of about 70 private companies located in Hong Kong and China that will be listed in New York.

When discussing internal business, a banker who asked not to be named said that the valuation of Chinese technology companies had fallen before the recent shock, and now it looks more volatile because investors hinted that they would ask for greater discounts. Buy stocks. So far this month, the Nasdaq Golden Dragon Index, which tracks some of the largest Chinese companies listed in the United States, has lost approximately $145 billion in value.

The core of the recent crackdown is the extent to which regulators will examine foreign investment in sensitive industries, especially those that control large amounts of data. For two decades, China’s technology giants have been circumventing restrictions, using the so-called variable interest entity model to attract foreign investment and offshore IPOs.

According to Bloomberg News, the China Securities Regulatory Commission is currently taking the lead in revising overseas listing rules, requiring VIE companies that do business in China but are registered in the Cayman Islands and other places to obtain approval before they can sell their shares overseas. China’s State Internet Information Office said on Saturday that its proposed review would address the risk of data “influenced, controlled and maliciously used by foreign governments”.

Undercut cost

Hong Kong looks likely to benefit from geopolitical and regulatory frictions, although transactions in this financial center may also be entangled by regulatory pushes. Bloomberg industry research analyst Sharnie Wong said that if the Chinese unicorn’s IPO comes to a halt, the Hong Kong Stock Exchange should still be boosted by the secondary listing and the conversion of American depositary receipts.

“Some Chinese companies operating in sensitive industries may consider listing in Hong Kong instead of the United States,” said He Zhiping, managing director of Haitong International Equity Capital Markets. “Currently, Hong Kong’s IPO channels are very active.”

Ten years after a Chinese company raised approximately US$76 billion in funding through its first share offering in the United States, the rerouting will weaken the bank’s revenue

Because fees vary by industry and underwriter, banks generally charge 1.5% to 2% of USD 1 billion in bonds in Hong Kong, and 3% to 5% in the United States. Bankers familiar with the matter said that for transactions of less than $500 million, this proportion will increase by about two percentage points or more.

In Mainland China, the listing fees on the Shanghai Science and Technology Innovation Board are roughly equivalent to those in the United States, but sponsors must jointly invest 2% to 5% of the shares issued by their clients. This unusual arrangement may limit interest due to the need for an onshore capital base Leading transactions that result.

The background of the tightening of regulations is China’s opening up of financial markets, allowing foreign banks and asset management companies to set up wholly-owned companies. Giants such as Goldman Sachs have been increasing the number of employees, seeking to double or triple the number of employees in mainland China in order to expand in the world’s second-largest economy to obtain potential profits of billions of dollars.

China’s STAR market, similar to Nasdaq, makes it easier for technology companies to obtain capital at home, but it emphasizes companies that focus on core technologies and innovation.

Martin Chorzempa, a senior researcher at the Peterson Institute for International Economics, said that compared with less than a decade ago, China’s reliance on its business has decreased. “In the world we live in, it is not that difficult for Chinese companies to raise large amounts of capital without going public.”

Even so, UBS’s Chin said that it is doubtful whether many Chinese companies can meet domestic listing requirements that have become more stringent this year.

“Eventually, they will have to list elsewhere,” he said. “We are very used to this kind of regulatory development and uncertainty. Eventually, business logic will prevail, and financing and IPOs will continue.”