The securities regulator has indicated it’s seeking to discourage firms from spinning off their most profitable parts for separate listings, which can be seen as unfair to the parent company’s shareholders, the people said. It also wants to ensure that any spun-off units operate in a different area than the parent, to reduce business overlap and related-party transactions, according to the people. 

Regulators have started scrutinising applications for spinoffs in the mainland Chinese and Hong Kong stock markets more carefully, the people said. They could introduce more formal guidelines as early as next year, the people said, asking not to be identified because the information is private. 

Some companies have already shifted plans, including GoerTek Inc, which this month shelved a spinoff and listing of its microelectronics unit in Hong Kong. Yantai Dongcheng Pharmaceutical Co also dropped a plan to take a subsidiary public in Hong Kong, while Zhejiang Shuanghuan Driveline Co halted a plan to debut its robotics division on China’s A-share market in September.

The tightening comes amid rising investor concerns and market volatility, particularly in sectors related to artificial intelligence, in which China plays a critical role. Some other countries including South Korea have also been tightening scrutiny on spinoffs, with SK Hynix Inc this week scrapping plans for a potential US$10 billion US listing of its Solidigm unit after regulatory opposition. 

Deliberations are ongoing and details of the Chinese regulator’s plans could change, the people said. The China Securities Regulatory Commission (CSRC) didn’t respond to a request for comment.

Several other deals are still in the pipeline for now. They include Zhejiang Medicine Co’s biotech unit NovoCodex Biopharmaceuticals Co and Shandong Gold Mining Co’s overseas subsidiary Shanjin International Gold Co. Both are still awaiting approval. Baidu Inc’s chip unit Kunlunxin has also been planning an IPO in Shanghai, as well as Hong Kong. 

In July, state-owned China Resources Power Holdings Co completed the separate listing of subsidiary China Resources New Energy Holdings Co in Shenzhen in one of the year’s largest A-share debuts. Shortly after, Hisense Group spun off its optical module unit, Ligent Technologies Inc, on the Hong Kong exchange.

Rules set in 2022 for spinoffs require the parent company to have been listed and profitable for at least three years, as well as capping the subsidiary’s contribution to its parent’s overall net profit and assets. The CSRC issued further guidelines a couple years later aimed at strengthening oversight and dissuading companies from tapping into unsustainable market hype for a quick cash fix.

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