For months, federal regulators have increased pressure on Beijing and Chinese companies that trade on U.S. stock exchanges to comply with U.S. listing rules.
But on Friday, five of China’s largest listed state-owned giants, valued at a combined $318 billion, announced they would instead exit Wall Street, marking an acceleration in the financial decoupling of the US and China.
State insurer China Life Insurance, energy giants PetroChina and China Petroleum & Chemical Corporation, along with Aluminum Corporation of China and Sinopec Shanghai Petrochemical, all said on Friday they would delist from the New York Stock Exchange (NYSE) as Washington and Beijing continue scramble to allow US inspectors to audit Chinese companies. The fight could see hundreds of China-based companies delisted from US stock exchanges.
Just in case, Chinese business is getting ready to be kicked off Wall Street. “State-owned firms are seeing the writing is on the wall for them,” Liqian Ren, director of advanced alpha at investment firm WisdomTree Asset Management, told Fortune, pointing out that a larger shift may be underway for other public China- based companies too.
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The U.S. and China are at loggerheads over a decades-old dispute over allowing U.S. inspectors to audit U.S.-registered Chinese firms. The US watchdog wants full access to the auditors and audit documents of Chinese companies, but China has refused, citing national security concerns. The US could delist more than 260 Chinese companies worth a total of $1.3 trillion by 2024 if Washington and Beijing fail to reach an agreement.
China’s securities regulator said in a statement on Friday that “listings and de-listings are … common in capital markets.” It added that the five state-owned firms had complied with US rules while listed on US stock exchanges and that their delisting decisions were “taken purely for business reasons”.
Other US-listed Chinese firms may follow in the footsteps of the five state-owned enterprises (SOEs). China’s two remaining state-owned enterprises listed on U.S. exchanges — two state-owned airlines — “will definitely consider” delisting from New York, Ren said. All of China’s state-owned firms hold information that Beijing considers sensitive or critical to national security that it doesn’t want US inspectors to have access to, meaning it wouldn’t be a surprise if the rest of the state-owned firms decide to opt out soon stock market, Brendan Brendan Ahern, chief investment officer at KraneShares, an investment fund focused on China, told Fortune.
Yet this hedging is not limited to state-owned firms. Other Chinese firms want to keep their US listings. But eventually, they will “review the situation and make a strategic choice,” Ren says. For most large firms, they will feel that listing in the US is risky and puts them at risk of being caught in the crossfire between Chinese and US regulators, especially amid deteriorating Sino-US ties, she says.
And non-state related companies seek to reduce these risks. On July 29, the US Securities and Exchange Commission (SEC) added Chinese tech giant Alibaba, which raised $25 billion in 2014 in the largest US IPO, to its delisting watch list. Alibaba announced it is changing its Hong Kong listing from secondary to primary status, allowing it an exit route in the event of a delisting – and one that allows it to attract investors from mainland China.
Stifled progress
In recent months, the SEC has continued to add Chinese companies to its already long list of firms facing delisting from U.S. stock exchanges. SEC Chairman Gary Gensler reiterated that the US will accept nothing less than full compliance from China.
Beijing reportedly wants to strike a deal with Washington that would separate US-registered Chinese firms based on the type of data they hold. China is seeking a compromise to allow most non-state firms to open their books to U.S. inspectors, but to limit inspections of state-owned firms and technology companies that hold sensitive information, said Adam Montanaro, investment director of global emerging markets equities at the investment firm. abrdn. Fortune earlier this year.
While “China does have incentives to improve its relationship with the US, [their ties] have been seriously damaged in the last few years. Confidence is very low, especially with the recent outbreak in Taiwan,” says Ren. At the same time, US regulators have been very clear that they want full access and compliance. There won’t be a two-tier access system” that Beijing wants, she says.
Ahern, however, argued that the delisting of the five state-owned firms was a positive sign that Washington and Beijing may be closer to reaching a consensus on delisting. Once all Chinese state-owned enterprises are delisted from Wall Street, “the remaining non-state companies have long said they have nothing to hide” from US inspectors, Ahern said.
However, the SEC’s watch list for delistings has only expanded – and the challenges facing US-listed Chinese firms have become even more difficult. The SEC has already flagged 159 firms, including Alibaba’s e-commerce rival JD.com, social and blogging giant Weibo, KFC parent Yum China and biotech firm BeiGene, to be kicked off Wall Street if they fail to comply. Washington “clearly will not budge an inch. There can be no compromise. The Chinese side [must] make everything yield,” China-focused research firm Trivium wrote in an April note.
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