1.1 Research Context
Over the past several decades, capital markets have become increasingly globalized, with many companies seeking to be listed in overseas markets. There has been a longstanding debate on the causes and effects of this progressive integration of international financial markets.Footnote 1 Major international financial centers, such as the United States (US), the United Kingdom (UK), Hong Kong and Singapore, have engaged in fierce competition to attract cross-border listings of foreign companies. It is widely accepted that one of the key enablers of success in this race is regulation.
As the world’s second-largest economy, China is one of the places of origin for most companies seeking overseas listing. At the same time, China has been making efforts to internationalize its capital markets with the view of attracting the listing of foreign companies. Since the early 1990s, a large number of Chinese companies have sought listings in overseas markets, notably the US and Hong Kong, and have come to be known as China Concept Stocks or Red-chip Stocks.Footnote 2 These overseas-listed Chinese companies have played a significant role in the host markets. For instance, as of November 2024, Mainland enterprises, which are based in Mainland China and listed in Hong Kong, accounted for 56.1 percent of all listed companies on the Stock Exchange of Hong Kong (SEHK), about 79.3 percent of the total market capitalization and about 90.5 percent of the total turnover value;Footnote 3 as of January 8, 2024, there were 265 Chinese companies listed on the US exchanges with a total market capitalization of $848 billion.Footnote 4 Hence, it is important to have a proper understanding of the regulation of these overseas-listed Chinese companies and their implications for the international securities markets.
In light of recent significant developments against the broad background of the ongoing competition (confrontation) between China and the US, the need for a deep, nuanced and contextualized understanding of the regulation of overseas-listed companies has become even greater. On the one hand, the US has adopted new regulatory policies for China-based US-listed companies in the past several years. In April 2020, the scandal of Luckin Coffee was exposed, attracting intense attention to the regulation of US-listed Chinese companies. In the second half of 2020, the US passed the “Holding Foreign Companies Accountable Act,” under which US-listed Chinese companies may be delisted from the US securities markets if they fail to meet certain requirements, such as giving US regulators access to their audit working papers in China.Footnote 5 This has prompted many US-listed Chinese companies to make a “homecoming” plan to seek cross-listings in Mainland China or Hong Kong.
On the other hand, in the past few years China has also made some significant changes to its regulatory policy and enforcement style toward the overseas listing of Chinese companies. A high-profile example is the case of DiDi, which is a well-known Chinese taxi-hailing company. It was listed in the US in late June 2021, but soon thereafter it was put under a data security and national security investigation. The company ultimately announced a delisting plan in December 2021. More recently, the Chinese regulators have issued a spate of new regulations on the overseas listing of Chinese companies. For instance, on February 17, 2023, the CSRC issued the Interim Measures for the Administration of Overseas Securities Offering and Listing by Domestic Enterprises, introducing a recordation regime for all modes of overseas listing of Chinese companies.Footnote 6
It is thus of both theoretical and practical significance to examine the regulation of cross-border listings from a Chinese perspective. Theoretically, examining the distinctive features of China’s regime for cross-border listings will contribute greatly to international discourse and debate on the issue of cross-border listings. Practically, it will provide policy suggestions to relevant governmental bodies, regulators and stock exchanges in China. It will also assess the implications of the Chinese experiences for foreign jurisdictions, particularly Hong Kong, which has been a major destination for the cross-border listing of Chinese companies. It will also supply useful information for private parties who do business with or invest in Chinese companies listed overseas.
1.2 Research Questions
This book examines several important yet under-studied questions regarding the regulation of cross-border listings of Chinese companies, including: What are the reasons for Chinese companies to seek cross-border listings? What effects does it have on the listed companies and the development of the home and host markets? How has China gradually established and recently strengthened its regime for cross-border listings? What are the factors that have contributed to the constitution of the institutional environment in which China’s regime for cross-border listings has been made and enforced? How can the regime be further improved in the future in striking a proper balance between facilitating the overseas listing of Chinese companies and protecting investors and national security interests? How should other jurisdictions, particularly the US and Hong Kong, cope with the issue of regulating cross-border listings through regulatory and judicial cooperation with China?
Although there have been some studies on the issue of cross-border listings, including some of the questions noted above, more research is clearly needed. To start with, existing studies of international cross-listings are mainly focused on the US as the host market, which is understandable due to the leading role of the US securities market. This has prompted suggestions from some commentators to focus more attention on other financial centers, particularly Hong Kong. Indeed, Hong Kong has long been a very popular destination for Chinese companies to seek cross-border listings. There are actually more Chinese companies listed in Hong Kong than those listed in the US, both in terms of the number of companies and the amount of market capitalization. In the context of the US market, a number of theories have been advanced to explain cross-listing, such as the market segmentation theory, the legal bonding theory, the reputational bonding theory and the theory of private benefits of control.Footnote 7 However, it is not clear which theory has the most explanatory power for the cross-border listings of Chinese companies, given the unique political economy context in which Chinese companies operate. Conversely, the Chinese experience can contribute to the theoretical debate on the issue of cross-listings. Hence, there is great value in examining the particular case of Chinese companies listing in alternative markets such as Hong Kong.
Second, although a small number of studies have started to examine cross-border listings of Chinese companies, they are largely outdated due to recent market and regulatory developments. As noted in Section 1.1, Chinese authorities have recently issued a string of new regulations in relation to the cross-border listing of Chinese companies. In light of the new developments, there is an urgent need to update the existing literature on the Chinese regulation of cross-border listings, make sense of how the new regulations have changed the regulatory landscape and evaluate its effects on both the local and international markets.
Finally, the existing legal studies are mostly doctrinal, with inadequate attention paid to the broader issue of the institutional environment in which the relevant regulation has been made and enforced. Indeed, apart from the significant changes made to the rules on the books, Chinese regulators have also adopted very different enforcement strategies with a never-before-seen level of vigor. For instance, China adopted stringent enforcement to effectively wipe out the afterschool tutoring industry, causing a violent shock wave to the US securities market where many China-based listed companies, such as New Oriental Education, lost as much as 80–90 percent of their value. The case of DiDi demonstrates how seriously China has now taken the issues of data security and national security. Clearly, there is a great need to examine the enforcement of the Chinese regime for cross-border listings in a systematic way. This entails an empirical study of relevant cases dealt with by the Chinese regulators and courts. At a more fundamental level, there is a need to examine the interaction between the political, economic and social factors which have contributed to the constitution of the institutional environment in which China’s regime for cross-border listings has been made and enforced.
In sum, there are significant research gaps in the existing studies in the area, which this book attempts to fill to produce a number of research findings which have both theoretical and practical value. While those questions are not easy to answer, this book attempts to take the first step in this area of study. To this end, this research project adopts an interdisciplinary approach and utilizes a mixture of research methods, including theoretical and documentary analysis, comparative analysis and empirical study in the forms of semi-structured interviews and case statistics.
1.3 Research Structure
This book is comprised of eleven chapters as follows. Apart from the Introduction chapter and the Conclusion chapter there are nine substantive chapters which are divided into two parts: Part I (General Legal and Theoretical Framework) consists of Chapters 2–5, while Part II (Specific Regulatory and Practical Issues) is Chapters 6–10.
Chapter 1 is a general introduction to the book. It sets out the research context, key research questions, research methodologies and other relevant information about the book. This sets the stage for the discussion of substantive topics in the following chapters.
Chapter 2 provides an overview of the development and regulation of the overseas listing of Chinese companies. It defines the main modes of overseas listings of Chinese companies, divides the historical development of the overseas-listing market into several stages and discusses how China has gradually established its regulatory regime in this area. It then focuses on the current regime, particularly the uniform filing regime introduced in 2023, including the key elements and their implementation issues. It also conducts an evaluation of the new regime and makes relevant comments. It pays particular attention to the case of DiDi, which serves as a wake-up call that data security and protection have now become increasingly important to the overseas listing of Chinese companies.
Chapter 3 investigates the reasons why many Chinese companies have decided to seek cross-border listings in the past three decades. It examines a variety of relevant theories, such as legal bonding, private benefits and market fragmentation, and evaluates the extent to which they may apply to the case of Chinese companies.
Chapter 4 looks at the issue of extraterritorial jurisdiction of Chinese securities law over Chinese companies listed overseas. In 2019, Chinese securities law was revised significantly to introduce an explicit provision on extraterritorial jurisdiction, but it is not clear how the provision may be applied in practice. In 2020, Luckin Coffee, a China-based US-listed company, was found to have committed serious accounting fraud, which generated an intense discussion on the application of extraterritorial jurisdiction. This chapter will contribute to this discussion and shed light on the future direction of development in this area.
Chapter 5 is focused on the impact of national security review for cross-border listings of Chinese companies within the broader context of foreign investment regulation in China. In the past few years, China has gradually established a comprehensive and stringent regime for national security review.
Chapter 6 is devoted to the topic of Variable Interest Entity (VIE), which is widely used for overseas listings of Chinese companies. The legality of VIE has long been a subject of intense debate in China due to its alleged circumvention of China’s foreign investment law. This chapter will look at the debate from a political-economy perspective and shed light on its future development.
Chapter 7 examines audit oversight issues concerning overseas-listed Chinese companies, paying particular attention to the disputes between China and the US. It also discusses how Hong Kong has managed to solve its audit dispute with Mainland China and how it has played an important role in solving the China–US dispute.
Chapter 8 discusses the regulation of market misconduct across borders, such as misstatement, insider trading and market manipulation. It looks at both substantive rules and enforcement mechanisms and then offers suggestions to improve cross-border regulatory coordination.
Chapter 9 examines the issue of whether and how foreign civil judgments against overseas-listed Chinese companies will be recognized and enforced in China. Again, the discussion was triggered by the case of Luckin Coffee because the defendant directors and the main assets of the company were all located in China, and the US court judgment could be meaningless if the defendants refused to cooperate, and Chinese courts refused to recognize and enforce the US judgments. This chapter thus provides an in-depth analysis of China’s recognition and enforcement of foreign civil judgments, particularly securities civil judgments, and offers possible solutions to the issue.
Chapter 10 looks at the listing of foreign companies in China, which is the other side of the coin of cross-border listings. Due to the threat of the US Holding Foreign Companies Accountable Act, an increasing number of Red-chip Companies have considered returning to the A-share market. Since 2018, China has tried to establish a regime to accommodate the listing of Red-chip Companies, as part of its long-term plan to internationalize the Chinese capital market by attracting genuine foreign companies to get listed in China.
Chapter 11 concludes with a summarization of relevant research findings and suggestions for improvement. It also identifies a series of questions to be answered by future research.
