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On March 30, JD Digits, the fintech subsidiary of ecommerce giant JD.com, joined a bevy of Chinese tech companies who have recently withdrawn their IPO applications from the Nasdaq-style STAR Market on the Shanghai Stock Exchange. The stock exchange terminated JD Digits's IPO two days later, a standard response to a withdrawn application, making it the 32nd IPO the exchange pulled off STAR in 2021.
The STAR Market was started in June 2019 to offer budding science and tech companies a way to access public market financing that was less burdensome than listing on China's other stock exchanges. But a Protocol data analysis has found that the Shanghai Stock Exchange terminated the review of a record-high number of IPOs — 31 — on its STAR Market in the first quarter of 2021. And it's not just because the ranks of IPO applicants have grown. Nearly 40% of the IPOs reviewed and granted "final" status in early 2021 — so designated either because they successfully listed or were terminated — were terminated. That's a spike from relatively low termination rates in the first three quarters of 2020:
Almost all of the STAR terminations in the first three months of 2021 were granted after companies had already applied to cancel their IPO plans.
This puts the STAR market on pace to nix 124 IPOs this year if it pulls off the same volume of IPO applications each quarter — a huge jump from 2020, and a sign Beijing is making good on its threats to tighten rules aimed at IPOs. Here's another view of the gauntlet an IPO applicant must run, one that appears tougher in 2020 than 2019:
As the graphic above shows, every currently listed stock on the STAR Market has had to pass through an inquiry, and about 43% of stocks had their application process paused at one point. The key barrier to getting listed on the exchange is gaining the approval of the STAR Market's Stock Listing Committee.
It wasn't long ago that the STAR market stood for the liberalization of once-stringent listing rules. In 2019, Chinese regulators tested the waters with a looser, U.S.-style registration-based IPO mechanism on the STAR, bringing a review process that once took between a year and a half and two years down to about six months. A host of Chinese tech startups responded by listing on the STAR Market.
But momentum started to slow late last year. STAR's historical termination rate is 25%, but it started climbing above this number in September 2020, then surged to 56% in January.
Both the total number and the proportion of scuttled IPOs has increased, and fewer firms have chosen to submit IPO applications in the first three months of 2021. December 2020 witnessed the highest number of IPO applications nixed in a month, at 15. After a striking 309 companies rushed to list on STAR between April 2020 and December 2020, the number of IPO applications plunged to 18 in the first quarter of 2021. The first quarter of 2020 saw a similar dip:
The surge of IPO withdrawals and subsequent terminations on the STAR Market over the past six months may be related to tightened rules over the bevy of tech companies rushing to go public there. In late January, the China Securities Regulatory Commission
announced it would spot-check IPO-seeking companies' financial and operational documents, business operations and bookkeeping systems. Inspectors would also talk to company executives, employees, suppliers and clients. The CSRC allows companies selected for "on-site inspections" to withdraw their IPO applications within 10 days after they are notified about a forthcoming examination.
The new rule has had a chilling effect; within a month, the Shanghai Stock Exchange revealed that it had attempted to conduct an on-site inspection of nine tech startups seeking STAR IPOs. But seven companies withdrew their IPO applications after learning that they would be inspected.
No turning back?
China's stock market watchdog has continued to signal that IPO review processes will tighten. In late March, CSRC Chairman Yi Huiman urged stock exchanges to "strictly perform [their] audit gatekeeping duties" toward tech companies and startups seeking to IPO. "The registration-based IPO system doesn't mean looser vetting requirements," Yi said.
Yi explained the increasing IPO cancelations were not because companies were dodgy, but because their IPO sponsors hadn't performed adequate diligence. Within two weeks of Yi's comment, the CSRC fined eight prominent investment banks for violations, five of which had sponsored IPOs on Shanghai's STAR Market.
The crackdown is broad; a Protocol analysis of the four industries with 20 or more IPO applications that have reached "final status" suggests one field isn't being favored over another. There are four industry categories used by the CSRC that have more than 20 IPO applications in STAR's history: specialized equipment manufacturing (专用设备制造业); pharmaceutical manufacturing (医药制造业); computer, communication and other electronic equipment manufacturing (计算机、通信和其他电子设备制造业); and software and information technology services (软件和信息技术服务业). Each has a historical termination rate of about 25%.
Financial experts say even more stringent rules on IPO applications are coming, as the CSRC has pledged to "improve the quality" of listed companies through new delisting mechanisms and a higher bar for future IPOs. On top of that, according to a new amendment to China's criminal law, effective March 1, harsher penalties will be imposed for activities that falsify "asset evaluations, accounting, auditing, legal services, sponsorship, and other supporting documents related to the issuance of securities."
"I believe that, unlike in the past, this round of regulatory tightening will be long and lasting," Fu Lichun, director of research at Northeast Securities, wrote in an analyst's note. "The tightening of regulation is a systemic change, and the decline in the IPO approval rate will continue."
Shen Lu is a reporter with Protocol | China. She has spent six years covering China from inside and outside its borders. Previously, she was a fellow at Asia Society's ChinaFile and a Beijing-based producer for CNN. Her writing has appeared in Foreign Policy, The New York Times and POLITICO, among other publications. Shen Lu is a founding member of Chinese Storytellers, a community serving and elevating Chinese professionals in the global media industry.
Clara Wang is a Researcher - Data Scientist for Protocol | China. Previously, she worked as a data scientist for the Biden campaign and at Civis Analytics, and she spent a summer working for the John L. Thornton China Center at the Brookings Institution. She has conducted research on data privacy, misinformation, and information control in the digital age, and she is completing her Master's in Economics at the Yenching Academy program at Peking University.