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China expected to extend regulatory crackdowns into 2022 -Breaking

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© Reuters. FILEPHOTO: A view of the Chinese national flag in Beijing, China on April 29, 2020. REUTERS/Thomas Peter

Kane Wu, Julie Zhu

HONG KONG (Reuters – China’s unimaginable crackdowns, roiling economies and halting transactions have prompted bankers and lawyers to expect more scrutiny for 2022. But, the banks and lawyers also believe clearer regulations will provide investors with some assurance about the regulatory climate.

Beijing has been cracking down on antitrust violations for the last year. It banned private tuition groups, reined into debt accumulation by property developers, and even made it nearly impossible to list offshore properties.

Analysts anticipate that these actions will continue into 2019, with a particular emphasis on data security and dealings that pose national security threats. Authorities also want to increase control over private enterprise.

Logan Wright from Rhodium’s China Market Research, said that “investors were forced to think about a variety of new regulatory risks in the last year” and added, “Those fears will not disappear anytime soon.”

He said that he had also witnessed some bureaucratic organizations expanding their reach in the recent months. This broadens potential regulatory concerns next year for investors.”

China in November elevated the status of the antitrust unit of the State Administration for Market Regulation to the deputy-ministerial-level, a bureaucratic promotion that gives it more access to resources for probing deals.

Reuters last week reported that the regulators plan to prohibit online brokerages offering offshore trading services for clients on mainland. This is in response to data security concerns and potential capital outflows.

Separately Beijing also increased its minority stakes, previously limited to news media outlets, in private firms, according to sources.

Alex Roberts from Linklaters is a Shanghai-based lawyer. She said that the regulators will look more deeply into the security network of large technology companies. They also expect greater overlap in data protection and regulatory objectives.

These regulations come as China enters a critical year, President Xi Jinping likely to be elected for a record third term as leader of the Communist Party.

Andrew Collier (Managing Director of Orient Capital Research, Hong Kong) stated that “the tightening [government] controls have been unprecedented in years since Deng Xiaoping slowly opened the economy.”

REGULATORY UNCERTAINTY

These actions are in line with Xi’s economic agenda which focuses more on party control over the private sector, greater wealth distribution, and a stronger focus on business ethics.

“I think that the regulatory structure has not been completed.” Collier stated that the process will be difficult to implement for several years.

Bankers said that investors are more cautious about where their money is going, particularly venture and private equity funds. This has led to increased due diligence as well as tougher valuation negotiations.

Many investors are now shifting their attention to areas seen by the government as being attractive, including semiconductors and new energy-related technologies, which support China’s goals of carbon reduction.

However, dealmakers expect clarity about China’s proposed offshore listing system that will require data screening by the country’s strong cybersecurity and securities watchdogs.

China Cybersecurity Administration ()Draft rules will be completed in the coming months that would subject companies that are data rich and seek offshore listings to inspections, if they deal with data that could pose a threat to national security.

The securities regulator will also be increasing scrutiny of Chinese companies listing overseas via variable interest entity structures. These structures were used historically by sensitive firms such as communication to avoid foreign investment regulations.

“2022 will be the year when the detailed regulatory rules land,” said Chu Yang, a Hong Kong-based partner at law firm Davis Polk & Wardwell.

There is an expectation that the regulatory uncertainty will ease in this area next year. This is especially true given the highly anticipated publication of red-chip listing rules in the coming months.

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