THE TIES that bind the world’s two biggest economies have been unravelling, in fits and starts, for a while. The latest episode involved fits, starts and confusion. On December 31st the New York Stock Exchange (NYSE) stunned investors by announcing that it would delist shares in China Telecom, China Mobile and China Unicom, the mainland’s three biggest telecoms firms, shares in which have been traded on Wall Street for years. It did so, it said, to comply with President Donald Trump’s executive order in November banning American investments in companies alleged to have links to the People’s Liberation Army (PLA).
This set off a fit among their American shareholders when trading resumed after the new-year weekend on January 4th. As the trio’s share prices swung wildly, funds scrambled to sell their stakes before the delisting, which the NYSE said would occur by January 11th. Speculation raged that CNOOC and PetroChina, state-run energy goliaths also listed in New York, could be next. Then came the start. Late on January 4th the NYSE declared it would not eject the firms after all.
The bourse said only that the U-turn was the result of “further consultation” with regulators. It did not respond to a request for further clarification, though a source familiar with the situation said that if “ambiguity” over whether the three companies are covered by the executive order is resolved, they may yet be delisted. Leland Miller of China Beige Book, a research firm, blames confusion in Washington, DC. The China hawks in the outgoing Trump administration are moving on, the Treasury is sympathetic to China-friendly Wall Street and Joe Biden’s incoming team wants no part of the discussion, he says.
Amid all this murkiness one thing is clear. Chinese companies listed in America are in for uncertain times. In December Mr Trump signed a bi-partisan law that would expel from exchanges in America those companies that do not allow American regulators to audit their accounts, which is the case for many Chinese ones. Mr Trump’s executive order is likely to remain a problem; Mr Biden may hesitate to rescind it. It affects more than 30 firms deemed too cosy with the PLA. To comply with it, FTSE Russell, which maintains global equity indices, plans to cut at least 11 Chinese technology firms from its roster. MSCI, a rival indexer, plans to boot ten Chinese firms from its benchmarks.
A rupture seems inevitable, then. How much will it matter? If it is limited to Chinese state-owned enterprises (SOEs), then not much. Only about a dozen SOEs trade in New York—and only thinly. Most have a more robust listing in Hong Kong or mainland China. Paul Gillis of Peking University argues that it “makes no sense for these companies to have us listings and be subject to us regulations”.
That leaves two other potential casualties. If private-sector firms are included then the number of Chinese firms listed in America swells to over 200, many of them in hot industries like technology and finance. Their combined market capitalisation exceeds $2.2trn. Many may have links (however tenuous) with the PLA.
Losing access to America’s sophisticated investors and deep pools of capital would sting such innovators as Lufax, a mainland fintech giant, which pulled off a $2.4bn flotation in New York in late October. It is why Alibaba, China’s e-commerce titan with a New York listing, hedged its bets in late 2019 by floating in Hong Kong as well. Others may follow.
Another victim would be American investors. Goldman Sachs, a bank, estimates they hold 28% of the $2.2trn in Chinese-linked market value. They could miss out. Chinese stocks traded in America have outperformed the S&P 500 index of big American firms in the past four years. Those with no secondary listing in China, which have most to lose from expulsion, did even better (see chart). A hasty exodus by Chinese stars could force a fire sale. With Mr Biden unlikely to go easy on China, the most investors in Chinese shares can hope for is more coherence—and fewer fits and starts.
Source: Business - economist.com
