Lufax Holding Ltd., a leading tech-enabled retail borrowing and wealth management platform in China, filed on October 7 with the SEC to raise up to $100 million in an IPO on the NYSE, aiming to raise about $3 billion soon. This news comes in the shadow of the ongoing U.S.-China trade war and increasing hostility from the U.S. administration toward Chinese companies.
Why did Lufax choose to pursue an IPO during such an extremely uncertain period? Typically, the direct answer would be either economic or non-economic, and given the current climate, it’s difficult to say that this is a compelling economic decision.
President Donald Trump has recently threatened to delist Chinese companies from U.S. stock exchanges. Thus, all Chinese based public companies in America will likely face heightened compliance costs. To make matters worse, recent scandals have caused investors to feel uneasy about betting on Chinese companies. China-based Luckin Coffee Inc., announced a huge scandal in April, acknowledging its chief operating officer had fabricated the company’s 2019 sales by around $310 million. Consequently, investors in the U.S. are increasingly reluctant to purchase stocks of Chinese companies without significant discounts. In fact, after the “Huawei Ban” & Tiktok disturbance, many Chinese companies, like JD.com, NetEase, and Jack Ma’s Ant Group, have given up on the idea of listing in the U.S., instead seeking to list in Hong Kong or Shanghai.
While LuFax’s IPO is a bold attempt, the motivations behind it are thoroughly considered. Regardless of the performance of Lufax, several factors may affect its long-term benefits from a U.S. IPO.
First, LuFax’s executives may not believe that financial ties between China and the United States will decouple in the long run. Conversely, such a connection will probably strengthen since the two countries have almost touched each other’s bottom line and settled unnecessary conflict.
Second, LuFax’s parent company, Ping An Group, has a highly dispersed share ownership–no single shareholder, or affiliated group of shareholders, has control over the firm. The board of directors of Ping An Group is also highly diverse compared to many other companies listed on the Shanghai or Hong Kong stock exchanges. This could offset the discount on LuFax’s stock price and reduce compliance costs.
Third, like LuFax, many Chinese companies are encountering the problem of local capital scarcity. The Shanghai and Hongkong stock markets have never been the primary source of financing for most Chinese companies–the government and banks are. However, to control the banking system’s recent debt risk, the Chinese government has restricted banks from lending money to companies. Thus, access to a securities market as mature as NYSE will still be a huge advantage for the company.
In conclusion, Lufax’s IPO has shown strong economic and strategic motivations for the Chinese companies to list on the U.S. securities market and may indicate an upcoming contra-flow. If the U.S.-China relationship moves toward cooperation rather than all-out confrontation or national isolation, the SEC and China’s regulators, the SEC and China’s regulators will likely need to coordinate in the regulation of these types of cross border flotations.