THESE DAYS politicians in Beijing and Washington seem to agree on very little. Yet on the subject of ending the listing of Chinese firms on American exchanges they are in uncommon harmony. The collapse last year of Luckin Coffee, a Chinese beverage-delivery group listed on the Nasdaq that was caught inflating its sales, reignited political grievances in America. The result was the Holding Foreign Companies Accountable Act, which requires companies traded on American exchanges to submit to audits or face delisting within three years. The precise rules are still being drawn up, but will probably eventually involve a great shedding of shares.
China, for its part, seems happy for its companies to leave American markets. Its regulators seemed unbothered when their actions demolished the share price of Didi Global, a Chinese ride-hailing company, just days after it listed in New York. New rules from the country’s cyberspace watchdog will make it harder for some firms to list outside of China. A sudden rule change in late July made online-tutoring firms serving school-aged children ineligible for overseas listings, wiping billions of dollars from several New York-traded Chinese stocks.
Rare as this moment of Sino-American agreement is, it hardly spells good news for investors. The American market has come to host $1.5trn-worth of Chinese companies. That sort of market value has not been cast off by exchanges before. So what kind of damage might delisting do to shareholders?
That Chinese companies still trade in New York at all is remarkable. For a decade now Beijing and Washington have sparred over the fate of China’s American Depositary Receipts (ADRs), as the shares of foreign companies trading in America are called. As a wave of accounting scandals at New York-listed Chinese firms began to wash over markets in 2011, American regulators started insisting on gaining access to certain accounting documents. Chinese officials have dug their heels in, refusing the requests and even making sharing the materials a crime.
There are some stocks for which delisting need not involve much pain. Many ADR contracts say that investors can convert those shares into corresponding securities listed on other exchanges, notes Wei Shang-Jin of Columbia Business School. Some of the biggest Chinese companies have been prepared, pursuing secondary listings in Hong Kong to which shares can be transferred. This started with BeiGene, a biotech group, when it launched a secondary listing in Hong Kong in 2018. Alibaba, which raised $25bn in New York in 2014, held a second listing in Hong Kong in 2019 to raise another $11bn. Of the 236 Chinese companies listed in New York, 16 have secondary listings in Hong Kong, with a combined market capitalisation of $980bn.
The situation looks bleaker for shareholders in other firms. Stock prices will be dragged down by the potential for instability. (The Nasdaq Golden Dragon China Index, which tracks Chinese firms listed in New York, is down by 45% since February.) This will give managers and other company insiders a chance to buy out American shareholders’ stock on the cheap, says Jesse Fried of Harvard Law School. The companies could eventually relist in China or Hong Kong at much higher valuations, but the original investors in the ADRs will not see a cent from the relisting. And shareholders are unlikely to have the right to review the valuation at which companies are taken private, notes Shaswat Das of King & Spalding, a law firm.
There is an even worse case. Some companies may simply “go dark”, meaning they stop reporting to American regulators and are delisted with no buyout at all. This might sound far-fetched—but it has happened before. In the aftermath of the accounting scandals of a decade ago, more than 100 Chinese companies vanished from New York’s exchanges, destroying some $40bn in market value. Many did not compensate investors. And shareholders in general stand little chance of recouping losses: because most Chinese groups have few assets in America, an angry shareholder seeking legal recourse would have to go to a Chinese court, says Joel Greenberg of Arnold & Porter, another law firm.
The smart move, then, is not to be caught holding these shares when delisting draws near. But here’s the catch. Ten years ago experts also called time on cross-border listings for Chinese groups. The market capitalisation of Chinese firms listed on American exchanges has risen ten-fold since.
This article appeared in the Finance & economics section of the print edition under the headline “Cease and delist”
Source: Finance - economist.com
