May 22, 2020 04:22 AM

Chinese Companies Aren’t Likely to Abandon U.S. Listings Soon

Signage is displayed outside the Nasdaq Market Site in the Times Square area of New York. Photo: Bloomberg
Signage is displayed outside the Nasdaq Market Site in the Times Square area of New York. Photo: Bloomberg

(Bloomberg) — Few expect Chinese businesses to abandon the U.S. as a listing venue after the U.S. Senate escalated tensions with China by overwhelmingly approving a measure that could lead to the barring of Chinese companies from American stock exchanges.

Relations between the world’s two largest economies have deteriorated markedly in the past few months. Tensions spilled over into Chinese companies’ access to U.S. capital markets following the collapse of Luckin Coffee Inc. shares, one of China’s brightest startups, as a result of accounting fraud.

The Senate bill passed Wednesday would require companies to certify that they are not under the control of a foreign government or submit to audits from a U.S. accounting agency to determine that. China’s refusal to let the Public Company Accounting Oversight Board examine audits of enterprises whose shares trade on American exchanges has long been a bone of contention.

Even as the environment for Chinese companies in the U.S. has become more hostile, the allure of the U.S. capital markets — with their better liquidity and deeper investor base — is unlikely to go away.

“It will be a delicate balance for investors weighing between the risks here,” said Jingyi Pan, market strategist at IG Asia Pte. “The U.S. may not drop off as one of the top IPO destinations for Chinese companies, long seen as a highly liquid venue which also helps in boosting the companies’ attractiveness. That said, worsening of U.S.-China ties could trigger considerations of alternatives in Europe and closer to home in Asia.”

A string of disappointing debuts by Chinese companies on U.S. exchanges last year added to angst among investors and policymakers, while some global banks began dropping out of deals, concerned about rising reputational risks. Of the 12 companies that listed in New York this year, just two are trading above their IPO prices, according to data compiled by Bloomberg.

“The recent Senate vote shouldn’t be seen as a bluff or an expression of temporary pique,” said Brock Silvers, chief investment officer of Adamas Asset Management. “The ‘Chinese exception’ of reduced auditing access won’t last for long. Nasdaq has offered a solution, but one which may not actually eliminate the loophole. No matter which party wins the election, China may face delistings should Beijing’s regulators not give ground.”

The latest move by the U.S could, however, prove to be a boon for rival exchanges like Hong Kong, which have sought to position themselves as alternatives for Chinese companies seeking international capital. Several U.S.-listed Chinese technology heavyweights, such as Inc. and NetEase Inc., are already gearing up for secondary listings in the financial hub.

The trend may accelerate as the U.S. becomes more hostile. Alibaba Group Holdings Ltd. has already done so, raising $13 billion in a massive share sale last year, which gives it a listing venue closer to home as well as providing a hedge against risks from increasing U.S.-China tensions.

Shares of Hong Kong Exchanges and Clearing Ltd. have risen 7.4% this week, helped by news that the bourse is planning to speed up the IPO process to bring it more in line with other international markets.

“Now that conditions to list in the U.S. are getting more difficult, many Chinese companies are likely to choose Hong Kong instead,” said Banny Lam, managing director at CEB International Capital Corp. “The reforms in Hong Kong will welcome those Chinese ADRs as secondary listings, and unlisted weighted-voting rights companies will be able to have primary listings in the city.”

Here’s what others are saying about the Senate bill:

Gary Dugan, chief executive officer of the Global CIO Office:

“I would expect the Chinese giants to be safe. I’m not so sure the U.S. authorities will escalate matters so far as to put at risk the listings of the Chinese majors. London would be an obvious market for the Chinese to turn to. Both London and Frankfurt have in the past tried to court the smaller companies sector.”

Shen Meng, director of Beijing-based boutique investment bank Chanson & Co.:

“It would dampen sentiment for Chinese ADRs in the short term, but I wouldn’t worry too much about the potential impact. It would be hard for U.S. authorities to prove some Chinese firms are under the influence of their government, and Chinese firms, especially those in the tech industry, wouldn’t easily give up on the U.S. market due to easier and more flexible rules.”

James Hull, a Beijing-based analyst and portfolio manager with Hullx:

“I don’t think it’s much of a shock. If you go back to last year, there were plenty of congressmen and senators talking about this idea of getting the disclosure requirements for foreign firms — Chinese U.S.-listed firms — aligned with U.S. domestic firms that are listed in the U.S. And that’s got a lot of bipartisan support.”

Justin Tang, head of Asian research at United First Partners in Singapore:

“Very simply, with the change in the HK Exchange, these Chinese issuers can go down the Alibaba, route. Where we saw valuation arbitrage in the Chinese ADRs in 2015, we will soon see a repeat of it, albeit in a slightly different form.”

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