Why Chinese companies like to IPO in the US

              

Why Do Chinese Companies Choose to IPO in the US Instead of China?

If you’ve been following global IPO trends, you've probably noticed a growing pattern: many Chinese companies are opting to list their stocks on US exchanges instead of at home. While this might seem counterintuitive, there are several key reasons why this trend has taken hold. Let’s explore why Chinese companies often choose to go public in the US and what this means for their future growth.

1. The Stringent IPO Criteria in China

The IPO process in China is notoriously demanding. To qualify for a domestic listing on the A-share market, companies must meet strict criteria, including proving profitability for three consecutive years and meeting certain thresholds for net income and assets.

This is where the problem lies for high-growth tech companies. Many are still in the early stages of development and aren't yet profitable, much like Amazon or Uber in their early years. The criteria in China don’t favor companies that are focused on scaling rather than short-term profits, pushing many of them to look westward, toward the US markets, where future growth potential is prioritized over past performance.

2. Political Connections vs. Business Potential

Another reason for this shift lies in the political landscape. In China, the IPO approval process can sometimes be influenced by political connections. Companies with strong ties to the government may have an easier time gaining approval, while those with excellent business models but less political clout could face delays or roadblocks.

This dynamic has led companies like Alibaba and Youku to choose US exchanges, where the focus is more on business potential than political influence. US markets offer clearer, more predictable rules that allow companies to showcase their innovation and growth potential without the added complexity of political favoritism.

3. Looking to the Future vs. the Past

One of the most striking differences between Chinese and US IPO processes is their approach to company performance. In China, the focus is largely on past financial performance what a company has done, not necessarily what it can do. This can be a major obstacle for rapidly growing companies that are investing heavily in their future rather than turning immediate profits.

In the US, exchanges like the Nasdaq focus on future growth, giving companies more room to present their long-term potential. For example, JD.com was able to list in the US in 2014, despite operating at a loss just two years earlier, something that would have been nearly impossible in China, where a profitable track record is typically a must.

This future-focused approach not only benefits the companies but also appeals to investors who are looking for the next big thing, rather than just evaluating a company’s past achievements.

4. Avoiding Short-Term Focus and Poor Decision-Making

In China, the pressure to meet stringent IPO criteria can encourage companies to make short-term decisions to inflate profits, whether through cost-cutting or other means. While this may help them meet the immediate IPO requirements, it often leads to long-term consequences. Once these companies go public, the weaknesses they’ve hidden can cause stock prices to plummet.

In contrast, the US market tends to value sustainable, long-term growth over short-term wins. This encourages companies to build their business models without the constant pressure to achieve short-term financial goals. It creates a more stable environment for both the companies and the investors who are willing to bet on future growth, rather than quick profits.

5. The Explosive Growth of Chinese IPOs in the US

Between 2000 and 2018, the number of Chinese companies listing on US exchanges grew by four times. By 2021, US stock exchanges hosted over $2.1 trillion worth of Chinese companies, marking the US as a dominant player in attracting international IPOs.

This explosive growth is a testament to the advantages the US offers: greater liquidity, access to a global pool of capital, and a regulatory environment that supports high-growth industries like tech and e-commerce. As a result, US markets have become a natural home for Chinese companies looking to scale on a global stage.

Conclusion: The US Remains the Go-To for Chinese IPOs For Now

In conclusion, the main reasons Chinese companies choose to IPO in the US rather than China come down to the flexibility and growth-oriented focus of US markets. Stricter domestic regulations, political influences, and a backward-looking IPO process make China less appealing for companies eager to tap into the global capital markets.

That being said, there’s always the possibility of change. With the rapid evolution of China’s financial markets and the increasing push for reform, it will be interesting to see if China adjusts its IPO process to attract more companies to list at home in the future.

For now, though, the US remains the go-to destination for Chinese companies looking to go public and access the global market.