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Chinese Firms Trade Lower as New Rules to Curb Some Offshore IPOs

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By Dhirendra Tripathi

Investing.com – ADRs and shares of Chinese companies traded lower in premarket Monday in a spillover effect of new rules the world’s second largest economy is bringing to curb new offshore listings in sectors restricted from foreign investment.

ADRs of Didi Global (NYSE:DIDI) and Alibaba (NYSE:BABA) traded down 2.5% and .5%, respectively. Both Pinduoduo (NASDAQ:PDD) and Xpeng (NYSE:XPEV) fell 0.3%. Baidu (NASDAQ:BIDU) was down 1%. Nio ADRs (NYSE:NIO) bucked the trend with gains of nearly 1%. The Financial Times reported that in addition, Didi Global has extended the date of their lock-up indefinitely, preventing employees from selling shares.

The move by the Chinese authorities is intended to plug a loophole long used by the country’s internet industry to raise capital overseas. There is now a list of sectors that are barred from getting foreign investment and Chinese firms operating in those areas will have to seek a waiver before proceeding for share sales, according to Reuters that quoted a statement by the National Development and Reform Commission and the Ministry of Commerce.

Overseas investors in such companies would be forbidden from participating in management and their total ownership would be capped at 30%, with a single investor’s holding restricted to 10%, according to the list that becomes effective January 1.

The regulators stopped short of a ban on IPOs by companies using the so-called Variable Interest Entities structure though the new rules are set to make the process more difficult and costly. VIE enables a Chinese firm to transfer profits to an offshore entity -- registered in places like the Cayman Islands -- with shares that foreign investors can then own.

The Chinese regulators have been concerned about the trove of data on Chinese consumers their listed companies possess and that they are forced to share with the U.S. authorities to comply with the laws there.

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