December 16, 2021
The continuing economic and financial decoupling of China and the United States is putting the heat onto Chinese companies listed on U.S. exchanges – and causing uncertainty for investors. Regulators in both countries are unhappy with certain practices employed by these companies that allow them to trade on the New York Stock Exchange and other U.S. exchanges, sparking expectations of a mass exodus.
The argument hinges on access to the financial data of these companies. Earlier this month, the U.S. Securities and Exchange Commission (SEC) announced that it was preparing to implement 2020 legislation that could see foreign companies banned from trading in the U.S. if they do not comply with auditing standards. The law was passed in response to repeated refusals from Chinese regulators to comply with requests to disclose audits. U.S. regulators insist they need to inspect audits of listed companies to prevent fraud, while Chinese regulators are concerned about sensitive data being leaked to foreign actors. The impasse may well see most Chinese companies delisted and cut off from U.S. capital markets, and relocate to either Hong Kong or Shanghai.
As if to underline the point, the SEC announcement coincided with news that ride-hailing giant DiDi, the second-largest Chinese company on U.S. exchanges, would be delisting from the New York Stock Exchange and moving to Hong Kong, less than six months after its $4.4 bn IPO in New York. Chinese regulators took a dim view of DiDi’s actions and within days had brought the company to heel with stringent new regulatory demands, forcing the company to suspend new user registrations. DiDi’s shares have fallen 50% since then. The delisting announcement is reported to have been made under pressure from Chinese authorities. Reflecting the increasing political risk, in recent months, many of the biggest U.S.-listed Chinese tech firms have taken up dual listings in Hong Kong, including e-commerce corporations Alibaba and JD.com, search engine Baidu, gaming firm NetEase, and social media company Weibo. For its part, Hong Kong has loosened rules for listing companies on its stock exchange, to absorb the newly vulnerable companies.
Under particular scrutiny is the controversial variable interest entity (VIE) corporate structure, whereby investors buy shares in a shell company which represents the operating company, allowing Chinese companies to avoid tough rules on foreign ownership. U.S. regulatory action on this practice is expected to take time, with no forced delistings anticipated until 2024, but the writing is on the wall, and investors will understandably be nervous about their holdings. According to Goldman Sachs, institutional investors in the U.S. hold around $700 bn of Chinese stocks. The Invesco Golden Dragon China ETF, holding Chinese stocks listed in the U.S., has fallen around 40% this year.Most of the Chinese companies listed on U.S. exchanges are focused on consumer tech, and the hostile treatment from Chinese regulators can be viewed in the context of a wider crackdown on these sectors, as China focuses its energies on areas viewed as economically and geopolitically important, such as renewable energy, electric vehicles, battery technology, military hardware, and AI. Stock analysts are suggesting that, for investors keen to put their money into China, these sectors are probably a better bet.
