US-listed China stocks: returned to sender

There is no place like home. Or so they say.

For Chinese companies listed in the US, the threat of a forced delisting looms large. The US Senate passed a bill in May that would prevent companies which refuse to open their books to US regulators from listing on Wall Street. JD.com, the ecommerce giant, and internet group NetEase both successfully pulled off secondary listings in Hong Kong. Domestic Chinese markets are surging.

Some 194 Chinese companies with a combined market capitalisation of $1.1tn are currently listed on the Nasdaq and the New York Stock Exchange, according to Refinitiv. Ten companies account for about 80 per cent of this market value. Alibaba alone is worth $600bn.

If the Senate bill becomes law, US-listed Chinese companies will have no choice but to withdraw from American exchanges. That is because Chinese laws prevent an auditors’ work from being transferred out of the country. Aside from the biggest of these companies, a listing back home is not an option.

For example, to qualify for a secondary listing in Hong Kong, a company must already have a market cap of least HK$40bn ($5.2bn). Or failing that, a minimum market cap of HK$10bn ($1.3bn) plus annual sales of HK$1bn ($129m). Based on the first criteria, only 11 per cent of the Chinese companies currently listed on Nasdaq and NYSE would qualify, according to a Lex analysis. Using the more generous second criteria only pushes the figure up to 22 per cent. 

This leaves the remaining 80 per cent at risk of being stranded overseas. More likely than not, these small-caps will end up being taken private by management, strategic buyers or private equity groups.

Wall Street firms that have been raking in big fees from Chinese IPOs will lose out. Chinese groups have raised more than $55bn in the US stock market since 2000, including $1.5bn so far this year.

But the US is right to hold Chinese companies listed in the US to the same regulatory standards and oversight as their American, Mexican or Brazilian counterparts. The move that is long overdue.

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