Hong Kong Firms Start Flagging China Risks in U.S. Filings

(Bloomberg) -- Hong Kong-based companies with little to no presence in mainland China are the latest to warn about the risks they face from Beijing’s crackdown on businesses, in a further sign of enhanced disclosures sought by American regulators in filings for U.S. initial public offerings.

Billionaire Richard Li’s FWD Group Holdings Ltd. filed last week for its long-awaited market debut, saying in its prospectus that it has “no substantive operations” on the mainland. Still, Chinese laws -- if applied -- could have a material impact on its business, it added. AMTD Digital Inc., a unit of former UBS Group AG dealmaker Calvin Choi’s AMTD Group Co., made no mention of such risks in its earlier filings in May and July, but added similar warnings in an Aug. 30 update. 

The declarations come at a time when the U.S. Securities and Exchange Commission is tightening regulations after Beijing’s broad clampdown wiped about $1 trillion in off Chinese stocks globally in recent months. The filings also show how some of those concerns are spilling over to Hong Kong, as the Communist Party exerts greater control over the Asian financial hub known for its free markets and independent legal system.

Following China’s imposition of a sweeping National Security Law last year on the semi-autonomous former British colony, the Biden administration warned investors in July about the risks of doing business in Hong Kong.

The filing by fintech company AMTD Digital provides a clear example of the ripple effects that China’s actions are having on swathes of private businesses.

“The PRC government has significant authority to regulate or intervene in the China operations of an offshore holding company at any time, which, if extended to companies operating in Hong Kong like us, could result in a material adverse change to our operations and the of the ADSs,” a Sept. 20 filing from AMTD Digital reads. 

A flurry of new rules and policy changes from Beijing has roiled industries from technology and health care to cryptocurrencies and tutoring, as President Xi Jinping seeks to reshape the world’s second-largest economy with an emphasis on “common prosperity.” The government’s move to rein in what it calls excesses -- from celebrity fandom to academic cram schools to video games -- has alarmed markets.

In a bid to shield U.S. investors from such risks, the SEC is also demanding better transparency from Chinese companies seeking a listing in the U.S. In August, Chairman Gary Gensler said that more than 250 companies already trading in the U.S. will soon face similar disclosure requirements. This month, the SEC expanded its warnings for investors.

The regulator, which has refused to approve new listings for Chinese firms since July, has drawn investors’ attention to a shell-company structure many Chinese companies use to list in the U.S. It has also asked them to look for any potential conflicts of interest between owners of a Chinese operating company and investors in the shell company that trades in the U.S.

For its part, China has also proposed stringent new rules for overseas listings, requiring companies possessing data on at least 1 million people to undergo a cybersecurity review and others to seek approvals.

“The PRC government has recently indicated an intent to exert more oversight over overseas listings and foreign investment in China-based issuers,” AMTD Digital said in its filing. “We cannot assure you that the oversight will not be extended to companies operating in Hong Kong like us.”

FWD’s filing made references to some of those new measures, as well as the new data protection law passed last month. 

The acquisitive Asian insurer said that should the cybersecurity review requirement apply to them, they “face uncertainties” as to whether such clearance can be obtained in a timely manner, “or at all.”

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