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China said it would tighten rules for companies seeking to sell shares abroad and strengthen oversight of overseas-listed companies, moves that could hinder attempts by homegrown firms to raise money in the U.S.

The shift comes as Chinese regulators intensify scrutiny into technology companies, including ride-hailing firm Didi Global Inc., that recently listed in the U.S.

The government said in new guidelines released Tuesday through state-run Xinhua News Agency that regulators need to deepen cross-border cooperation over audit supervision and amend laws and regulations “on data security, cross-border data flow and other confidential information management."

The guidelines were drafted in the context of “profound changes in the economic and financial environment," amid what authorities described as mounting lawlessness in the capital market that had made regulatory oversight more challenging, it said.

In recent days, a unit of China’s cybersecurity regulator said it launched data-security reviews into popular mobile apps operated by Didi, Full Truck Alliance Co. and Kanzhun Ltd., which raised close to $7 billion in total from U.S. initial public offerings in June.

Chinese companies have flocked to list on American stock exchanges, raising more than $75 billion from U.S. IPOs since 2012, according to Dealogic data.

In the year to date, some 36 companies from China have gone public in the U.S., the same number as the whole of 2020. Didi’s recent IPO, which raised $4.4 billion, was the largest since Alibaba Group Holding’s 2014 blockbuster stock sale, which fetched $25 billion.

In its detailed statement, the Chinese government vowed to revise rules for stock offerings on exchanges outside of China. It also called for more accountability of domestic regulatory bodies and better interagency coordination.

The measures could have far-reaching implications for a raft of China’s tech giants that are planning IPOs offshore, and for the global investment firms that hold stakes in them. Many investors bought into fast-growing Chinese startups expecting to cash out after the companies list on global exchanges.

The scrutiny is particularly targeted at companies heading to the U.S. for listings, said Bruce Pang, head of macro and strategy research at China Renaissance Securities

“Such actions create short-term disruption and pressure on market sentiment, not only on listed tech companies but also the valuation of pre-IPO companies," he added.

The move also comes as the U.S. tightens rules governing foreign companies listed on its stock exchanges. Congress passed a bill last year—which was signed into law by then-President Donald Trump—that requires the audit papers of U.S.-listed foreign companies be open for U.S. regulatory inspection. Failing to comply for three consecutive years will result in delisting.

Chinese securities regulators have long resisted giving their U.S. counterparts routine access to such audit working papers, citing national-security concerns.

The issue is that Chinese companies’ audit information “may involve the confidentiality of information and data in China," said Li Daxiao, chief economist at Yingda Securities.

The latest directives could help plug a long-running regulatory loophole that has allowed many Chinese tech companies to raise funds in overseas stock markets without much scrutiny at home.

Chinese internet companies typically adopt a so-called variable interest entity structure that gives them flexibility to raise funds offshore. They are usually registered in offshore tax havens such as the Cayman Islands that fall outside China’s legal jurisdiction.

That has spared the companies from the same regulatory scrutiny and rigorous IPO vetting that is applied to Chinese companies planning to list domestically.

The Chinese government has attempted to close the loophole. It made amendments in its securities law to provide a legal basis for enforcement actions involving overseas-listed Chinese firms. They include penalizing overseas capital-markets activities that hurt investors in China. No enforcement has resulted so far.

Last year, after Luckin Coffee Inc. revealed an accounting fraud and said it inflated its sales, the China Securities Regulatory Commission publicly criticized the company’s misdeeds, but didn’t impose any penalties on Luckin or its executives that were complicit in the scheme.

Luckin is registered in the Cayman Islands and conducts most of its business in China. It was delisted from the Nasdaq Stock Market last summer, a little over a year after it went public.

This story has been published from a wire agency feed without modifications to the text

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