The Singapore Law Gazette

Listing Chinese Companies in Singapore

Recent developments in the US and China have led to growing uncertainty as to whether Chinese companies can continue to list in the US, and if existing companies may be forced to delist. In recent years, the Singapore Exchange (SGX) has also revised its listing framework, increasing competitiveness and offering various avenues for Chinese companies, businesses and assets to list on the SGX. This note explores some of these avenues, and the possibility of more Chinese companies seeking to list their businesses and assets on the SGX in light of the recent changes to rules regulating the listings of Chinese companies in the US.

Changes in Regulatory Climate and Rising US-China Tensions

In May and December 2020, the U.S. Senate and House of Representatives respectively passed the Holding Foreign Companies Accountable Act (HFCAA). The HFCAA directed the US Securities and Exchange Commission (SEC) to prohibit securities of any issuer from being listed on any of the US securities exchanges if the auditor of the issuer’s financial statements is not subject to the US. Public Company Accounting Oversight Board (PCAOB) inspection for three consecutive years¹This period may be reduced to two years if the Accelerating Holding Foreign Companies Accountable Act is signed into law. after the HFCAA becomes effective. With most auditors of Chinese issuers being located in China, where the PCAOB has been unable to conduct inspection without the approval of Chinese authorities, there are concerns whether US listed Chinese companies may be delisted from the US stock exchanges if they are unable to meet the inspection requirement under the HFCAA.

The Chinese government is also increasing its scrutiny on overseas listings of Chinese companies. It appears that the main casualties are Chinese companies listed in the U.S. including Didi Chuxing, a leading ride-hailing Chinese company, which listed on the New York Stock Exchange in June 2021. Shortly after its listing, the Didi application was banned from accepting any new users, and the Cyberspace Administration of China (CAC) initiated a cybersecurity review against the company as well as two other Chinese companies that recently listed in the US, citing concerns over data and national security.²China’s crackdown on U.S. IPOs is a windfall for Hong Kong—so long as it can handle the influx of listings (18 July 2021), Fortune <https://fortune.com/2021/07/18/hong-kong-china-tech-ipos-listings-overseas-influx/> The CAC swiftly issued the draft rules of Measures for Cybersecurity Review, opening them for public consultation. It proposed that any company with personal data of more than one million users must seek the Office of Cybersecurity Review’s approval before listing its shares overseas. The draft rules also proposed that companies must submit their IPO document dossier to the Office of Cybersecurity Review for review ahead of the overseas listing.

Shortly thereafter, on 30 July 2021, the SEC issued a statement warning about the risks of investing in Chinese companies, and stated that IPO filings by issuers associated with China-based operating companies would have to provide additional disclosures before their filings would be effective, and that there would be additional reviews for companies with significant China-based operations.³Statement on Investor Protection Related to Recent Developments in China (30 July 2021) <https://www.sec.gov/news/public-statement/gensler-2021-07-30> SEC Chair Gary Gensler, said on social media platform Twitter that he had asked SEC personnel to “take a pause for now”⁴See <https://twitter.com/garygensler/status/1427364280383442945?lang=en> in processing applications from Chinese companies for Initial Public Offerings (IPOs) in the United States through shell companies, also known as a Variable Interest Entity (VIE) structure – this is further elaborated below.

Most recently, on 24 December 2021, the China Securities Regulatory Commission (CSRC) issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (the “Administration Provisions”) and the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (the Measures) for public review. Among others, the draft Administration Provisions and Measures set out various filing requirements for overseas listings that apply to both direct and indirect overseas listings (which includes VIEs). The draft Administration Provisions also provide for the establishment of a regulatory coordination mechanism with other relevant authorities, which would enable closer supervision of overseas listings by the relevant regulatory authorities. How these provisions would be implemented and carried out in practice remain to be seen.

The uncertain regulatory climate and increased US–China tensions have led to Chinese companies putting on hold their plans to list in the US, and possibly looking to list elsewhere, including Singapore and Hong Kong SAR. Against this backdrop, this note examines the Singapore Exchange (SGX) as a viable listing venue for Chinese companies.

How Chinese Companies, Businesses and Assets Can List on the SGX

As of June 2021, about 41 per cent of the aggregate market capitalisation of the SGX-listed companies are contributed by overseas companies. Out of these, companies from the Greater China region (comprising China, Hong Kong SAR and Taiwan, Province of China) account for about 33 per cent, representing one of the largest overseas regions. Chinese companies and businesses are thus a vitally important contributor to the Singapore equity capital markets ecosystem.

Over the years, Chinese companies and businesses have undertaken listings in Singapore via various avenues, depending on the unique circumstances of each company and business. Apart from the traditional red chip IPO, where the Chinese company would restructure its business and assets into an offshore structure for listing overseas, we set out below various other avenues for Chinese companies, businesses or assets to list on the SGX.

Secondary Listings

As US regulators are tightening requirements for Chinese companies and making it harder for them to list on the US exchanges, there is increased uncertainty as to whether they would be able to remain listed on the US exchanges. Having a secondary listing on the SGX, with Singapore seen as a more neutral jurisdiction, can act as a natural hedge or eventually a fallback for issuers. A secondary listing on the SGX would also give Chinese companies greater access to capital, outside from its home market base of investors.

Under the regulatory framework that came into effect on 3 November 2014, where a company has a primary listing on the Main Board of a developed market, the SGX will not impose additional regulatory requirements on the secondary listed company. The US is considered a developed market.

As an alternative option, if and when a delisting from the US is necessary, Chinese companies with an existing primary listing in the US and a secondary listing in Singapore may eventually consider converting its secondary listing in Singapore into a primary listing and delisting in the US.

Real Estate Investment Trusts (REITs)

The Singapore REIT market is the largest REIT market in Asia (ex-Japan). Out of over 40 REITs and property trusts listed on the SGX, more than a quarter have exposure to Chinese real estate assets. Since 2015, the SGX has experienced a resurgence of Chinese listings with a China-focused REITs or business trust listing completed every year between 2015 and 2018.

Types of China-Focused REITs Listed on SGX

REIT/Business Trust	Investment Focus	Year of SGX Listing
Sasseur REIT	First outlet mall REIT listed in Asia	2018
Dasin Retail Trust	First and only China retail property trust providing direct exposure to the Guangdong-HongKong-Macau Greater Bay Area	2017
EC World REIT	First specialised and e-commerce logistics REIT listed on the SGX	2016
BHG Retail REIT	First pure-play China retail REIT sponsored by a China-based group	2015
Mapletree North Asia Commercial Trust (formerly known as Mapletree Greater China Commercial Trust)	First REIT with commercial properties in both China and Hong Kong	2013
Capitaland China Trust (formerly known as Capitaland Retail China Retail)	First and largest China-focused REIT	2006

With close to 20 years in the making, China has finally launched its inaugural public REITs (C-REITs) with the first nine REITs listed in June 2021 on the Shanghai or Shenzhen Stock Exchange as part of an official pilot scheme introduced by the Chinese government in 2020. The Chinese REIT market has the potential to be one of the largest, if not largest, REIT market globally.⁵China takes first steps toward launching 3 trillion REIT market, Bloomberg (2 June 2020) <https://www.bloomberg.com/news/articles/2020-06-02/china-takes-first-steps-toward-launching-3-trillion-reit-market>>

Chinese authorities are, however, taking a measured approach towards C-REITs. Currently, C-REITs are only permitted to invest in infrastructure projects such as highways, industrial parks and sewerage plants, and these assets must be located in one of six designated economic regions, including the Yangtze River Delta and the Guangdong-Hong Kong-Macao Greater Bay Area. S-REITs, on the other hand, can invest in any commercial and residential real estate, including shopping malls, hotels, office buildings, nursing home and student accommodation. There are no geographical or asset class restrictions on an S-REIT’s portfolio. Another key differentiating factor is C-REIT’s relatively low debt-asset ratio which is capped at 28.6 per cent, reflective of the Chinese policy-makers’ cautious attitude towards excessive leverage in the infrastructure sector. On the other hand, the Monetary Authority of Singapore raised further S-REIT’s aggregate leverage limit last year from already 45 per cent to 50 per cent of its deposited property till end of 2021 to help S-REITs cope with the challenging environment due to the Covid-19 pandemic.⁶New Measures to help REIT Navigate Operating Challenges Posed by Covid-19 (16 April 2020), Monetary Authority of Singapore < https://www.mas.gov.sg/news/media-releases/2020/new-measures-to-help-reits-navigate-operating-challenges-posed-by-covid-19 > Lastly, compared to the rather complex taxation regime in China, S-REITs stand to enjoy clear tax transparency treatment from the Inland Revenue Authority of Singapore.

Based on its product features, there is no doubt that C-REITs are currently designed to cater exclusively to the domestic market, and it will take some time before Chinese policy-makers decide to open C-REITs to international markets. Therefore, even with the advent of C-REITs, due to its above limitations, the C-REIT market is not likely to replace Singapore’s leading position as a global REITs listing hub. In fact, with the increasing awareness and exposure of REITs as a viable asset class in China due to the introduction of C-REITs, we foresee that S-REITs, as a close Asian counterpart would also stand to benefit, in particular, from China’s deep investor base and real estate asset pool. Amidst increasing onshore financing pressures faced by the Chinese property developers such as the “three red lines” deleveraging campaign introduced by China in August 2020, the macro-economic environment for property developers in China (including tightened domestic liquidity conditions) augurs well for SGX as a prime overseas REITs listing destination of choice for real estate players in China.

VIE Listings

Pursuant to the Special Administrative Measures for Access to Foreign Investment (Negative List) (2021 version) of the PRC (the Negative List), a foreign investor is unable to own or otherwise hold any equity interest in entities engaged in businesses in which foreign investment is prohibited. In order to engage in such business and maintain the necessary licences and permits, foreign-incorporated holding companies have to adopt contractual arrangements to conduct operations in the relevant restricted industries in China. These contractual arrangements (generally known as VIE structures) confer control and economic rights to the foreign-incorporated holding companies, while complying with the applicable foreign ownership prohibitions in the PRC, including those under the Negative List. Such foreign-incorporated holding companies could then undertake a listing out of China.

There were a number of VIE listings in Singapore since the early 2000s up till 2010, which saw the listing of Xinren Aluminium Holdings Ltd. However, with the uncertainties surrounding VIE listings, there was a dearth of VIE listings for some 10 years in Singapore until the listing of GHY Culture & Media Holding Co., Ltd., in December 2020. This followed a listing decision issued by the SGX in December 2018 (updated in March 2021) which provides some clear guidelines including SGX’s considerations and proposed safeguards and disclosure requirements in assessing the suitability of a VIE structure for listing.⁷SGX Listing Decision, LD-2018-02 (Updated in March 2021) <https://api2.sgx.com/sites/default/files/2021-03/Updated%20FOR%20Listing%20Decision%2001-03-2021_2.pdf>

Singapore’s regulators and authorities will likely take a case-by-case approach in assessing VIE listings. It is thus advisable for Issue Managers and Full Sponsors to seek confidential pre-consultation with the SGX in relation to VIE listings.

In view of the recent concerns over cybersecurity and the restrictions placed on Chinese technology companies, there has been renewed speculation over the Chinese authorities’ stance over the VIE structure. However, with the Chinese authorities approving the listing of Megvii Technology Limited, an artificial intelligence company with a VIE structure, on the Science and Technology Innovation Board of the Shanghai Stock Exchange on 9 September 2021, this may indicate that it is the overseas listing of Chinese businesses that Chinese authorities are concerned with, and not the VIE structure per se. This position, endorsing VIEs, had also been echoed in the recently issued draft Administrative Provisions which states that VIE structures that comply with PRC laws, regulations and requirements can list overseas, and this was also confirmed by the CSRC in a formal interview.⁸Relevant Officials of the CSRC Answered Reporter Questions (24 December 2021), China Securities Regulatory Commission <http://www.csrc.gov.cn/csrc_en/c102030/c1662398/content.shtml>

Special Purpose Acquisition Companies (SPACs)

SPACs are companies with no prior operating history, operating and revenue-generating business or assets at the time of listing. They are formed to raise capital through an initial public offering for the sole purpose of acquiring operating business(es) or asset(s) within a certain time period. Once the acquisition has been successfully completed, the private target company then effectively becomes a public company.

On 3 September 2021, the regulatory framework enabling SPACs to list on the Mainboard of the SGX came into effect, giving Chinese companies another method of listing on the SGX. As the requirements and regulatory framework for SPACs in Singapore are largely comparable to the rules in the U.S., Chinese companies originally seeking to list in the US via a SPAC may consider doing so in Singapore as a feasible alternative.

The de-SPAC or business combination exercise is essentially a form of reverse takeover. Shareholders and management in the target will usually receive shares in the SPAC as part of the sale consideration (and in many instances become the majority shareholders) with members of the target’s board joining the board of the listed entity. The target will, in effect, reverse into the SPAC’s listed status. Being acquired by a SPAC is thus a real alternative to a traditional IPO for companies seeking to go public. A private company which chooses to list on the SGX by way of a business combination with a SPAC will provide it with more certainty around its valuation and equity capital raised.

At the start of this year 2022, both Vertex Technology Acquisition Corp (backed by Temasek Holdings) and Pegasus Asia (backed by European asset manager, Tikehau Capital) have each filed their prospectus, and are set to complete their SPAC listings in Singapore by end of January 2022. Other private equity funds are also expected to join Singapore’s SPAC race.

Chinese private equity firms can thus also adopt SPAC as an exit strategy by either sponsoring a SPAC and then merging or selling one of its investee companies into it or as a straight exit in a de-SPAC exercise with an existing SPAC.

Direct Listing Framework (DLF)

Companies incorporated in mainland China can consider listing in Singapore directly as “S-Shares”. In 2013, to streamline and facilitate the direct listing of companies incorporated in mainland China on the SGX Mainboard, SGX introduced the DLF. Under the DLF which simplifies the approval process, Chinese companies which have obtained approval from the China Securities Regulatory Commission are able to apply to list on the SGX directly.

The S-Share listing route has not been widely adopted as only the S-class Shares are permitted to be traded in Singapore. Hence, founders of the Chinese company would not be allowed to trade their shares until they convert their founder shares into S-Shares. While not frequently used, with the regulatory uncertainty in China, the DLF may offer Chinese companies and investors greater peace of mind, with the knowledge that such a listing has the approval of the Chinese government as compared to a VIE listing. Further, such a listing structure allows the S-Share listed company to directly undertake an A-share listing in China without the need for further restructuring. As such, this listing route can be considered by Chinese companies which are already listed in China and wish to undertake a dual listing overseas or by Chinese State-owned Enterprises wishing to tap into capital markets overseas.

Concluding Remarks

As can be seen from the above analysis, Singapore offers multiple options for Chinese companies, businesses and assets to list, and has frameworks in place that may meet the requirements of these Chinese companies. With US-China tensions bringing about restrictions and heightened regulatory scrutiny on Chinese listings in the US, coupled with the multiple options for listing in Singapore, it is believed that listing in Singapore will become increasingly attractive to Chinese companies seeking an overseas listing venue.