US investors are facing the growing risk of losing out on Shein’s potentially huge initial public offering, as the fast-fashion giant with Chinese roots considers holding it in London instead. Dealmakers in New York once reaped huge fees from Chinese companies going public; now they wonder whether the regulatory clouds that set in after Didi Global Inc.’s 2021 US IPO turned into a debacle will ever lift. With the first $1-billion-plus IPO in New York by a Chinese-owned company post-Didi safely in the books as of February, investors are watching to see if Shein can also break through the impasse — and what it means for Chinese IPOs in the US if they fail.

How did Shein become controversial?

Shein’s roots in China played a big role in its initial success, but in some ways they’ve have come back to bite it. Founded in 2008, the e-commerce pioneer gained attention in 2021 as it became the most downloaded shopping app in the US, overtaking Amazon. The company managed to more than triple its sales during the Covid-19 pandemic, to a staggering $10 billion in 2020, making it the biggest web-only fashion brand in the world.

Its runaway success has been attributed to its prowess with data, favourable tax treatment for small packages and, more controversially, to its vast network of contract manufacturers that pump out thousands of youth-friendly styles daily at ultra-low prices. Critics and rivals have assailed the company over concerns about the environmental impact of disposable fashion, pay and working conditions for those assembling garments, anti-competitive behaviour and even evidence that some cotton in its clothing was made with forced labour.

A Bloomberg News study in 2022 found that garments shipped to the US by Shein were made with cotton from China’s Xinjiang region, where the US State Department has alleged human rights abuses against the Uyghur people, which China denies. A statement from a company spokesperson said that Shein has a zero-tolerance policy for forced labour and requires its contract manufacturers to source cotton only from approved regions.

Can Shein’s critics stop the IPO?

The potential IPO has been a lightning rod for politicians such as Marco Rubio. The Republican senator asked the US Securities and Exchange Commission in a February letter to consider blocking the listing, following reports that the company had approached Chinese regulators for permission. Rubio said the company needed to disclose more about its operations in China, despite having moved its headquarters to Singapore.

Enter the UK, whose IPO market could use a boost — especially one the size of Shein’s, should it achieve the $50 billion valuation seen in private trades. Shein is considering a listing in London instead, and Britain’s chancellor of the exchequer, Jeremy Hunt, has already had talks with Shein’s executive chairman, Donald Tang, Bloomberg News reported in February. That, too, could draw political opposition, but the desperate need to keep IPO bankers in London busy could outweigh it.

What about other Chinese IPO plans in the US?

Executives of Chinese companies remember when things were different. Alibaba Group Holding Ltd.’s $25 billion New York listing in 2014 was the largest ever at the time, and numerous start-ups from the country were drawn to the large, liquid US market that didn’t require they turn a profit in order to go public.

The decline in relations between the US and China found its analogue in 2021, when Beijing opened a cybersecurity probe into Didi just days after its $4.4 billion US listing, over concerns about foreigners gaining access to data with implications for national security.

The ride-hailing company’s fall, and eventual de-listing, heralded a series of crackdowns on the country’s technology sector that effectively halted sizable Chinese IPOs in the US. About a year and half later, the stance has softened, and regulators have toned down rhetoric about curbs on overseas listings, so long as the firms meet requirements regarding the use of personal data and state secrets.

Despite the softening stance, new Chinese IPOs remain for the most part small and rare. No single Chinese issuer raised more than $200 million in the US last year, a far cry from 2021 when a dozen companies each raised more than that figure.

This year is looking a little better, if not for conventional listings. Lotus Technology Inc., an electric-vehicle unit of China’s Zhejiang Geely Holding Group Co Ltd., went public in New York through a merger with a blank-check vehicle.

Amer Sports Ltd.’s $1.4 billion listing in January is by far the biggest since Didi, but it’s also an outlier. Even though the maker of Wilson tennis rackets, Salomon ski boots and Arc’teryx outdoor gear is majority-owned by a Chinese-led consortium, its roots and much of its current operations are focused in Europe and the US, making it less sensitive from a regulatory perspective.

Amer said in its IPO filing that its counsel thinks they don’t need approval from the country’s securities regulator; by contrast, China’s internet watchdog is subjecting Shein to rigorous probing over its handling of data.

Will things go back to how they were any time soon?

That’s unlikely, considering all the tension even for companies that aren’t receiving scrutiny from members of the US Congress.

The SEC has expressed concerns about the quality of Chinese firms’ risk disclosures and continues to demand more of those to protect investors. New guidance on the issue was released last July. At the same time, Chinese companies are coming under pressure from domestic regulators about so-called “risk factors” warning language in their US IPO prospectuses.

As part of new overseas listing rules introduced in 2021, Beijing prohibits investment banks from including comments that misrepresent or disparage China’s laws and policies, or the business environment and judicial situation of the state, the Financial Times reported in January.

If US and Chinese regulators can’t find a characterisation of the risks of investing in Chinese companies that they can agree on, there’s little chance of the once-mighty China-to-US IPO pipeline reopening.

If not New York, then where?

Shein and other companies caught in the China-US tussle — including TikTok owner ByteDance Ltd. — have options, though none of them are quite as appealing as a spot on the New York Stock Exchange or Nasdaq. Hong Kong would make a better alternative for Shein than London, some investors say, given comparable Chinese peers with huge e-commerce footprints such as Alibaba and Tencent Holdings Ltd.

If a London listing doesn’t pan out as expected, the company could turn to Singapore, whose IPO market is in even worse shape than London’s. Any venue shift would require Shein to submit a new application with Chinese regulators, who would ask for additional materials and clarifications.

By Dong Cao, Yiqin Shen and Pei Li