Capital Market Update: China’s New National Nine

In April 2024, China’s State Council released a guideline on strengthening supervision and promoting development of the country’s capital markets. The overall goal is to establish a framework within five years and build a competitive and inclusive capital market by 2035. Widely referred to as the new National Nine Articles (NNA), the updated rules have changed the way companies are doing business in China.

Core Components of the NNA

The NNA encompasses nine key areas, as depicted in the graphic below. The first area lays out the general requirements that reflect the overarching goals for market development. The second sets strict standards for initial public offerings (IPOs), enhancing the scrutiny of listing qualifications, while the third addresses the ongoing supervision of listed companies as a way of strengthening compliance and governance.

The NNA’s fourth area intensifies delisting oversight to ensure market vitality through rigorous exit mechanisms. Regulating securities and fund institutions is the goal of the fifth area, a next step towards refocusing the industry on its core functions and fostering excellence. The sixth area enhances trading supervision to bolster market stability.

Promoting long-term investment and encouraging sustained participation by institutional capital is the seventh area addressed by the NNA, while the eighth offers a comprehensive reform and opening up of markets to support high-quality economic growth. Finally, the ninth area promotes coordinated efforts for market development to facilitate multi-stakeholder collaboration.

Current institutional oversight

In terms of the current institutional framework, the China Securities Regulatory Commission (CSRC), the Shanghai Stock Exchange (SSE), and the Shenzhen Stock Exchange (SZSE) have established rules governing a range of issues, including IPO reviews, spin-off listings, refinancing, mergers and acquisitions, sponsorship, issuance and underwriting, stock trading and transfer listings.

While the country’s main boards feature mature, industry-leading enterprises, SSE’s STAR Market focuses on cutting-edge technology and firms offering core innovations, stable business models and high growth potential. SZSE’s ChiNext, in contrast, serves innovative, growth-oriented enterprises, particularly those integrating traditional industries with emerging technologies and business models.

Reviews and inspections for IPOs

Enterprises wanting to go public must meet a number of requirements, including market capitalization and financial benchmarks. They must also demonstrate financial compliance and operational independence, not to mention lawful conduct. Major instances of negative publicity, moreover, could thwart their attempts to become listed.

Companies wanting to go public are subject to review both from exchanges and from the authorities. The SSE and SZSE conduct independent assessments, supported by specialized committees such as the STAR Market’s Science and Technology Innovation Advisory Board. Oversight here focuses on compliance with listing standards and disclosure quality. In addition, the CSRC evaluates alignment with national industrial policies and sector positioning, finalizing registration based on exchange recommendations.

Companies can also undergo on-site inspections, with random visits to 20% of applicants taking place quarterly. Targeted inspections are conducted to address unresolved material issues affecting listing eligibility.

Investor-centric approach required

When it comes to disclosures, issuers must ensure all information provided is true, accurate and complete and that it is presented in a clear, concise and investor-friendly manner. Moreover, it must be free of false statements and misleading representations, and have no material omissions. The stock exchanges review companies’ disclosure documents to enhance their completeness and quality.
 
To meet the new requirements, issuers must adopt an investor-centric approach, aligning disclosures with their sector positioning and industry trends. Disclosures must address the enterprise’s business model, corporate governance and development strategy, as well as operation and accounting policies and financial analysis. They must also cover risk factors, profitability status (if the company is not profitable), the reasons for any performance decline, and the dividend policy. Information on the use of proceeds, dual-class share structures (if any) and lock-up arrangements must also be included.

Qualifying as a major restructuring

Companies undergoing reorganization should be aware that a transaction qualifies as major restructuring if any of the following thresholds are met:

• The total assets purchased/sold exceed 50% of the company’s latest audited consolidated total assets.
• The revenue generated by the assets purchased/sold exceeds 50% of the company’s latest audited consolidated revenue and surpasses CNY 50 million.
• The net assets purchased/sold exceed 50% of the company’s latest audited consolidated net assets and surpass CNY 50 million.

For STAR Market and ChiNext listings, the acquired assets must align with the company’s sector positioning. They must also belong to the same or related industries, and demonstrate synergies with the company’s core business.

Threat of backdoor listings

Something companies must watch out for is being classified as a backdoor listing. Authorities in China will regard a deal as a backdoor transaction if, within 36 months after a change in control, a listed company acquires assets from the acquirer or its affiliates that exceed 100% of the company’s audited consolidated total assets in the fiscal year before the transaction. The same applies if revenue from the acquired assets exceeds 100% of the company’s audited consolidated revenue in the fiscal year before the transaction, or the acquired net assets exceed 100% of the company’s audited consolidated net assets. In addition, shares issued for the acquisition may not exceed 100% of the company’s total shares as of the trading day before the board resolution approving the transaction. Finally, companies must avoid any other scenario that materially alters their core business, even if the above thresholds are not met.

Lock-up periods and price protection

Companies must follow some general rules when it comes to issuing shares for asset acquisitions. For example, they may raise supporting funds concurrently when issuing shares for asset purchases. In terms of pricing, the issue price cannot be lower than 80% of the market reference price (20/60/120-day average prior to announcement of the board resolution).
 
There is a standard 12-month lock-up period for shares obtained via asset contribution. Alternatively, the lock-up period is 36 months if the investor is the controlling or actual shareholder or an affiliate, if the transaction results in a change of control, or if the investor held the contributed assets for less than 12 months.
 
Another important aspect is the price protection clause, which mandates that controlling shareholders must extend the lock-up by six months or more if either the share’s closing price for 20 consecutive trading days is less than the issue price within six months of the deal, or if the closing price is less than the issue price at the six-month anniversary of the transaction.

Adequate disclosure, relevant positioning

The exchanges evaluate whether any potential restructuring meets the eligibility criteria and whether the relevant disclosures are adequate. Key considerations here are the necessity of the transaction, the fairness of the asset’s valuation, the feasibility of performance commitments and if the listed company’s or shareholders’ interests are protected.

For the STAR Market, moreover, the target asset must be aligned with the STAR segment’s positioning and offer industry synergy, i.e. it must service the same or upstream/downstream sectors. Similarly, ChiNext transactions must reflect ChiNext positioning and offer synergies with the acquirer’s core operations.

Conclusion

As a major regulatory overhaul, the NNA has impacted the workings of China’s capital markets and, above all, added a host of new rules that companies and investors must remain aware of as they do business in China or with Chinese partners.