By guest author Jack Wong from Wall Street Journal
Tensions between the U.S. and China have spilled into the capital markets. Many U.S.-listed Chinese companies will start to plan their trips back home.
On Wednesday, May 20, 2020, the Senate unanimously passed a bill that could force Chinese companies to delist from U.S. stock exchanges. The key issue—China’s refusal to let American regulators inspect the audits of its companies—has festered for years, but escalating tensions have lifted it to the top of the political agenda. The recent accounting debacle at Luckin Coffee has added impetus.
The legislation would prohibit trading in a company’s shares if its auditor hasn’t been inspected by the Public Company Accounting Oversight Board, a U.S. audit watchdog, for three straight years. It would also require listed companies to reveal whether they are owned or controlled by a foreign government.
Chinese companies with a primary listing in the U.S. have an aggregate market capitalization of around USD 1 trillion, or 3.3 % of U.S. markets, according to Goldman Sachs. More than half of that comes from just one company—Alibaba.
The Senate bill still needs to be passed by the House and signed by the president to become law, and along the way the terms could be watered down. But it still makes sense for U.S-listed Chinese companies to look for a fallback option.
Hong Kong is an obvious candidate. New York Stock Exchange-listed Alibaba raised $13 billion there last November in a secondary listing. Its Nasdaq-listed rival JD.com has filed a confidential application to do the same. Perhaps tellingly, shares of Hong Kong Exchanges & Clearing, the city’s stock-exchange operator, have outperformed the Hang Seng Index since President Trump said two weeks ago he’s looking at Chinese companies that trade on U.S. exchanges but don’t follow U.S. accounting rules.
But the national-security law Beijing is about to impose on Hong Kong casts a cloud over the bourse’s future. Hong Kong’s rule of law and strong protections for free speech and the press, along with its open capital account, have long been its advantages over mainland Chinese exchanges. The day after plans for the new law were announced, the Hang Seng Index fell nearly 6 %.
A potentially higher valuation in Shanghai and Shenzhen may be an even bigger draw for newly footloose U.S.-listed Chinese companies. After Hong Kong-listed Semiconductor Manufacturing International Corp., China’s leading chip maker, said it may seek to raise billions of dollars on the Shanghai Stock Exchange’s new technology stock board, its shares jumped 11% in one day. The chip maker delisted from New York last year—over low volume and administrative costs, it said, rather than U.S.-China tensions.
Expect to see a flock of Chinese companies migrating homeward from the U.S.