Will Chinese Stocks Delist From U.S. Exchanges Under Increasing Pressure From Washington?

In the wake of the U.S. Senate unanimously approving a bill that could lead to the delisting of some Chinese stocks on U.S. exchanges, Chinese companies are scrambling to respond to the threat.

Reuters reported that Chinese search engine giant Baidu Inc (BIDU) – one of the first Chinese firms to trade on American exchanges -- is considering leaving the Nasdaq voluntarily and moving to other exchanges as a means of boosting its valuation.

Baidu shares have dropped about 17.2% year to date – and plunged more than 60% since hitting a peak in May 2018.

Baidu’s co-founder and Chief Executive Robin Li told the state-controlled China Daily newspaper last week that the company was closely watching efforts by the U.S. to increase scrutiny of listed Chinese companies.

“Our basic judgement is, if it’s a good company, there are many options for places to list. It’s not limited to the U.S., so we aren’t that worried that pressure from the U.S. government will cause irreparable damage to the company’s business,” said Li.

“We are constantly discussing what we can do internally, including secondary listings in Hong Kong and other places,” Li told the Xinhua news agency. “We are indeed very concerned that the United States is constantly tightening the control of Chinese stock companies.”

Baidu – with a current market cap in excess of $36 billion -- reportedly thinks it is undervalued on the Nasdaq exchange.

If Baidu joins the Hong Kong exchange, it would join two other Chinese conglomerate behemoths, e-commerce giant Alibaba (which started trading there last year) and tech mammoth Tencent (2004).

Alibaba (BABA) – with a market cap of $545 billion – also trades on Nasdaq.

“Only Chinese [American Depositary Receipt] companies with large market caps would consider a secondary listing in Hong Kong, given the cost and relative advantage of such a move,” said Bruce Pang, a research analyst at investment bank China Renaissance.

For Chinese ADR firms with small market caps, Pang added, the best idea would be a voluntary delisting from the U.S. exchange before a primary listing in Hong Kong.

Baidu, Alibaba and other Chinese companies are wondering what will happen if and when the U.S. Senate bill becomes law (if it passes in Congress). Te development is viewed as part of a wider economic conflict between the U.S. and China --relations already frayed by the ongoing coronavirus pandemic.

"The list of anti-China actions is quickly growing in [Washington] D.C.," wrote Ed Mills, Washington policy analyst at Raymond James. "In the current political environment, few, if any, members of Congress want to be seen as supporting China. This legislation is moving at warp speed.”

Recently, the Thrift Saving Plan, a retirement fund for U.S. federal workers and military members, postponed plans to invest in some Chinese stocks under pressure from Donald Trump’s White House. Labor Secretary Eugene Scalia warned that investing federal savings in certain foreign companies could place "billions of dollars in retirement savings in risky companies that pose a threat to U.S. national security.”

American officials have long complained that Chinese domiciled firms – including those trading on U.S. exchanges – are too secretive and do not abide by U.S. audits, regulations and accounting standards.

Nasdaq recently pressured Luckin Coffee (LK), a Chinese coffee chain engulfed in widespread accounting fraud, to delist. Nasdaq also introduced some tough new rules that would make initial public offerings much harder for some Chinese companies.

Essentially, the U.S. Senate bill would prohibit trading for stocks whereby U.S. regulators have not been able to inspect the company’s auditor for three consecutive years.

“We can't let foreign threats to Americans' retirement funds take root in our exchanges,” said Sen. John Kennedy (R-La.) who introduced the bill along with Chris Van Hollen (D.-Md.).

The bill would also require companies to prove that they’re not controlled by a foreign government.

"The Chinese Communist Party cheats, and the Holding Foreign Companies Accountable Act would stop them from cheating on U.S. stock exchanges," Kennedy, a member of the Senate Banking Committee, tweeted.

Van Hollen said: “We just want Chinese companies to play by the same rules as everybody else. This is an important step forward for transparency… Publicly listed companies should all be held to the same standards, and this bill makes common sense changes to level the playing field and give investors the transparency they need to make informed decisions.”

Kennedy declared on the Senate floor: “I do not want to get into a new Cold War. China to play by the rules.”

“In the past several months, U.S. politicians proposed to delist Chinese companies from U.S. stock exchanges with different criteria, and cap Americans’ exposure to the Chinese market,” wrote analysts from China Renaissance. “We expect the debate to remain among the top topics of the 2020 U.S. presidential election.”

China Renaissance suggested the U.S. could also seek to limit Americans’ exposure to the Chinese market through government pension funds and also impose restrictions on Chinese companies that are components of stock indexes managed by U.S. firms.

“This would definitely drive more Chinese companies to list in the greater China area,” said Tianjun Wu, deputy economist at the Economist Intelligence Unit.

In fact, Hong Kong’s benchmark Hang Seng index has made it easier for large Chinese companies by allowing them to join the index even if they have primary listings elsewhere.

Morgan Stanley predicts that more U.S.-listed Chinese companies will likely seek secondary listings in Hong Kong.

Chinese Renaissance estimated that 36 Chinese firms currently listed on U.S. exchanges would qualify for a secondary listing in Hong Kong.

“This trend should help retain and attract more capital inflow into the Hong Kong market in the long run and help strengthen a more Asia-based trading and investment base for Chinese companies,” Morgan Stanley wrote.

However, departing U.S. exchanges could hurt the prestige and ‘brand’ of some Chinese firms.

“For the Chinese business, that would mean losing a brand premium of being listed in the U.S. The U.S. stock market has long been viewed as much more transparent than the local markets [in greater China],” said Wu of the EIU.