Hong Kong and the US are likely to attract more IPOs from mainland Chinese companies in the second half of the year after IPOs plummeted amid increased regulatory scrutiny.

Aggregate funds raised via such offerings in China's two main exchanges — Shanghai Stock Exchange and Shenzhen Stock Exchange — plunged to $4.01 billion in the January-to-June period from $29.80 billion in the same period in 2023, according to S&P Global Market Intelligence data. The extent of the decline is visible in that the 2024 first-half result was also less than the already-low $15.89 billion raised in the preceding six-month period and was the lowest half-year result since at least the first six months of 2020 when companies raised $20.07 billion.

The number of deals also lays bare the extent of the challenges, with just 34 completed in the first half versus 136 in the year-ago period and 99 in the prior half.

"The mainland IPO market will likely remain tepid as regulators tend to stay cautious on the pace of approval, and more issuers hit the pause button on their applications," Ringo Choi, Asia-Pacific IPO leader at EY, said in an interview with Market Intelligence. "Chinese firms would prefer listing in the US market, where the valuations are higher, or Hong Kong if sensitivity of their business models, such as EV and chip-related, becomes an issue," Choi said.

The China Securities Regulatory Commission (CSRC) announced new rules in March, seeking to improve the quality of new listings and enhance the responsibilities of sponsors and exchanges. In April, the State Council, the top administrative body in mainland China, released guidelines to strengthen supervision and reduce risks in the capital market. These, commonly referred to as the National Nine Articles, call for "management of issuers from listing to delisting" and an increase of supervision over market institutions acting as gatekeepers of the capital market.

The decline in IPO activity was due to tightened regulations, including those of the CSRC and the State Council, as well as sluggish post-listing performance and outflow of funds due to a strong dollar, analysts said.

Mainland China's equity market has been tepid in the first six months of the year, while stock benchmarks in several peer markets, such as the US, Japan and India, touched all-time highs as investors prepare for a turn in the monetary cycle and inflation shows signs of abating. The benchmark CSI 300 stock index is still 35% below its 2021 peak, even after recovering 11% from its multiyear low of 3,108 in February.

Stricter regulations reduced the number of A-share IPOs awaiting approval in China to 454 by June 30, from 767 at the end of 2023, with proactive withdrawals accounting for 98% of terminations, according to EY.

Quality over quantity

This, while reducing the number of IPOs, could lead to more quality listings, analysts said.

"The overall pace of listings in [mainland China's] A-share market slowed down since the second half of 2023 due to the tightening regulatory environment, as regulators prioritize the quality of new listings over quantity in order to promote long-term stability and growth," Irene Chu, partner, head of New Economy and Life Sciences, Hong Kong at KPMG China, said via email.

The IPO requirements tightening "helps to distinguish companies that are more competitive and with greater growth potential, leading to positive changes in the IPO ecosystem," EY's Choi said.

Still, there was a strong representation of companies linked to the semiconductor and robotics industry among companies listing in the first half, underscoring the steady support for growth in these crucial industries, Chu said.

In addition to the two boards, mainland China also operates the NASDAQ-like Shanghai Stock Exchange Science and Technology Innovation Board (STAR) and Shenzhen Stock Exchange ChiNext. It also operates the Beijing Stock Exchange, which is designed as the primary platform for small and medium-sized enterprises.

"We expect the STAR market and the ChiNext board to remain steady as companies in technology-media-telecommunication (TMT) and industrial sectors continue to list by way of these bourses in the second half," Chu said, citing strong representation of companies linked to these crucial industries.

Silver lining

Some hope of a recovery could lie offshore, however. IPO fundraising on the Hong Kong Exchanges and Clearing Ltd. declined 20.9% from a year ago to $1.70 billion, but number of deals increased to 31 from 28, according to Market Intelligence data.

"The Hong Kong IPO market is experiencing a renewed sense of positivity with an upswing in the number of IPO applications," said Chu.

As a supplement to the National Nine Articles — which aim to beef up supervision on not only IPO but also other market activities such as algorithmic and quantitative high-frequency trading — the CSRC released its "Five Measures" that encourage mainland companies to also consider Hong Kong as a listing venue. As many as 72 companies have completed their filing to go public in Hong Kong, "paving the way for streamlined financing channels for listing in the city," the CSRC said in its release on April 19 date.

The growth in Hong Kong was attributable to factors including the Five Measures, the growing trend of A-share IPO applicants transitioning to the territory and the expectation on interest rate cuts in the second half of the year, Chu said.

"Given these positive signs, we maintain cautious optimism regarding the gradual resurgence of IPO activities in Hong Kong in the remains of 2024," Chu said.

As of June 30, the Shanghai Stock Exchange remained at the top of the global league table, ranked by aggregate proceeds since 2020, followed by New York Stock Exchange Inc. and Nasdaq Inc. Shenzhen and Hong Kong ranked fourth and fifth, respectively.

Globally, aggregate IPO fundraising declined by 14% year over year to $52.88 billion in the first half of 2024, while number of deals slipped by 9% to 616, according to Market Intelligence data.