Market Views: Is US delisting of Chinese companies part of a larger trend?
Five Chinese state-owned companies are seeking to delist from the US amid an unresolved auditing dispute that could see dozens of mainland Chinese firms ejected from American exchanges, while ties between the two nations continue to worsen.
Some believe this is part of a larger trend that will see more Chinese firms delist from the US.
On August 12, China Life Insurance, PetroChina, and China Petroleum and Chemical Corporation (Sinopec) have all indicated they would apply for the “voluntary delisting” of their American depositary shares (ADSes) from the New York Stock Exchange, according to their filings to the Hong Kong stock exchange, where their shares are also listed.
The smaller Aluminium Corporation of China (Chalco) and Sinopec Shanghai Petrochemical Co will also apply to delist their ADSes this month.
AsianInvestor asked asset managers and analysts their views on how the delisting of Chinese companies in the US could influence investment appetite, market shifts, as well as demand in Shanghai and Hong Kong.
The following contributions have been edited for clarity and brevity.
Redmond Wong, market strategist, Greater China
Saxo Capital Markets
The market capitalization of the 24 Chinese companies which are listed in the US through an ADR program and at the same time have a secondary or dual listing in Hong Kong (HK-listed ADRs) reached $700 billion. Currently only about 20% of their trading volume takes place in Hong Kong.
Delisting of the HK-listed ADRs from the US will move a substantial amount of their turnovers from the US to Hong Kong. For the 200-plus Chinese ADRs that do not currently have a dual or secondary listing in Hong Kong, when delisting from the US bourses, moving to get listed in Hong Kong is their most feasible option.
Some of the US institutional investors who are restricted by their mandates and individual investors who have a home-market-bias may divest their holdings after these Chinese companies terminate their ADR programs. The damage can be mitigated, to a certain extent, by being able to get onto the list of Southbound Stock Connect with a Hong Kong primary listing to open the door to funds from mainland China investors who are unable to invest in ADRs.
The possibility of moving the primary listing to Shanghai or another exchange other than Hong Kong is remote. The delisting of Chinese ADRs may add as much as 20% of trading volume to the Stock Exchange of Hong Kong. The investor base of these Chinese ADRs will likely shift to having more investors from mainland China via the Stock Connect and less US-based investors.
Raj Shant, managing director and portfolio specialist
Jennison Associates, the equity business of PGIM
We don’t think it will be a big issue for global markets or for the Chinese market for a number of reasons. Firstly, most of the biggest US-listed Chinese companies have established secondary listings in Hong Kong already, with many moving to turn those into their primary listings. The market has had plenty of time to digest the process.
Secondly, the recent announcement about the delisting of five Chinese state-owned enterprises (SOEs) from the US lends further support to the popular idea that the Chinese regulator may be willing to negotiate an audit deal with the US regulators for the remaining (private) companies that remain listed in the US. That should alleviate concerns about whether the Chinese equity market is deep enough to absorb a mass return of all those companies still listed in the US and allow investors to focus instead on the fundamental drivers of future growth prospects.
Rather than the listing destinations, what’s more important for us is whether the companies have quality growth potential and offer products and services that are aligned with the government’s strategic priorities.
Lorraine Tan, director of equity research in Asia
For the five SOEs that are delisting their ADRs — other than the headlines that dampened sentiment — we see little or no impact to the companies, as their ADRs represented a small portion of their investor interest (generally less than 1% of share capital for four of the five while for SNP Shanghai Petrochemical, it was less than 5%). In fact, PetroChina’s announcement indicates that their ADRs only represent 3.9% of their H-shares or 0.45% of their total share base. The five companies are already listed both in Hong Kong and the mainland. As a result, we don’t see too much net increase to their HK and China listings either.
The ADR delisting risk has been one of the regulatory risk issues that had already been dampening US investor appetite for Chinese companies over the past year. However, we believe that the domestic China regulatory risks are more material as they impact actual business and operations.
We believe these risks are lessening, and more signs of an abatement of the domestic regulatory risks coupled with an attractive valuation and better earnings outlook will eventually lead to a return of investor interest. Even if a company shifts its primary listing to Hong Kong, if its share price is perceived to be overvalued, there may not necessarily be an increase in investor interest. Hence a sustained pick up in interest for the HK/Shanghai listings will probably depend on the quality of the company shifting its primary listing.
Alexander Davey, global capability head for active and quantitative equity
HSBC Asset Management
We believe the announcement of SOEs delisting their ADSes is not a surprise to the market. The costs of maintaining the listings are relatively high; however, ADS trading has not been particularly active for some time.
Additionally, the negative impact should also be reduced as the ADSes accounted for less than 2% of their H-Shares, and more inactively traded ADSes of Chinese SOEs may follow the delisting. Instead, we are closely monitoring the American depositary receipt (ADRs) de-listing risk, especially for internet platforms and data intensive firms, as the PCAOB’s determination and identification of audit firms under the HFCAA is a jurisdiction-wide determination, and not a firm-specific determination, which is arguably more conservative.
If there is not a proper resolution, ADR delisting may come as early as Spring 2023. Although more ADRs are dual listing (primary and secondary) in Hong Kong and a higher number of shares re registered in Hong Kong, the US is still the most liquid for most of the ADRs.
While the two countries struggle to come to an agreement allowing American regulators to inspect audits of Chinese businesses and the approval process of listing overseas has become more complicated now, we expect Hong Kong and onshore markets to be the major fund-raising venues for Chinese firms in the near future. Together with the improvements in the Stock Connect program and more A-H dual listings, onshore China A-Shares will be more synchronised with the Hong Kong market in the long term. However, the key is still whether the depth of liquidity in Hong Kong can support the increasing market size.
William Chuang, Asian equity portfolio manager
I expect we will see more and more Chinese ADR shares to announce dual primary listing in Hong Kong to mitigate the risk of forced delisting from the US.
The demand for Chinese stocks traded in Hong Kong has historically benefitted from the large pool of global investors present here. It has the potential to rise further through attracting investors that are no longer able to access the China story through ADRs.
At the same time, obtaining the eligibility for stock-connect will give these companies exposure to a new investor base in China. For example, onshore investors now own close to 9.5% of Meituan through the stock-connect and accounts for over 30% of daily trading volume. As more stocks come to Hong Kong, market liquidity and depth should improve.
For Chinese companies that are traded onshore, the Northbound stock-connect already offers a way for foreign investors to participate in China’s growth. One area to monitor for investors is whether the Southbound stock-connect will attract liquidity away from A-shares.
I have not heard people talk about the reshuffling of listings domiciles making it easier to invest in Chinese companies. However, a consideration for companies thinking about abandoning their US listing status must also include the possibility that some of their current US retail and institutional shareholders cannot hold foreign securities and will be lost as shareholders.
Jonathan Pines, head of Asia ex Japan
Most Chinese US-listed ADRs are dual-listed in Hong Kong, with full fungibility. For such ADRs you don’t even need to sell your stock in the US and buy it in Hong Kong. You just need to call up the custodian and get the holdings swapped over into the Hong Kong line. Some ADRs do not have a dual listing, perhaps because they do not qualify for a redesignation of the Hong Kong line as a primary listing, and investors in such issues are at elevated risk.
Indeed some ADR holders may become increasingly at the mercy of less scrupulous management teams. Shareholders of ADRs with no Hong Kong line may find themselves in the unenviable position of protesting in vain to an uninterested board of directors who might shrug their shoulders, offer faux apologies, tell them to blame US regulators — not them — as they engineer a forced buyout of their stock followed by a delisting, and then relist for the benefit of controlling shareholders on friendlier exchanges.
There is precedent for this type of behaviour by less scrupulous management teams and controlling shareholders. Around five years ago when many investors were concerned about accountancy fraud, many US-listed Chinese ADRs took advantage of low stock prices and poor takeover laws applying to Cayman-listed companies on US exchanges to buy out minorities cheaply. This enabled directors to capture the value for controlling shareholders alone as delisted ADRs were relisted months later on other stock exchanges with previous minority shareholders excluded.
All our holdings in US-listed Chinese ADRs already have a secondary listing in Hong Kong, with stock classes being fully fungible — and we believe this mitigates delisting risk. For some, there is a slight risk surrounding a redesignation of the Hong Kong line as primary (rather than secondary) following the delisting of the US line; however, we don’t foresee difficulties with this. First, Hong Kong exchanges will benefit substantially from being the only place where these giants can be traded (hence incentivizing the redesignation); second, “homecomings” are supported by the Chinese government; and, third, all our holdings are profitable, which is one key Hong Kong requirement for a primary listing.
One residual risk for holders of even dual-listed fully fungible ADRs is that they might trade at a lower valuation because US stock markets have tended to drive higher valuations than other markets. However, we do not think this is too significant and we would attribute a market valuation/liquidity resultant discount of no more than 10%. Moreover, some of the larger companies that will be delisted from US exchanges will be dual-listed in the China mainland (A shares).
So instead of H+ADR listings as is currently the case for many large companies, some will have H+A listings. We expect companies that have dual A-H listings (with a stock connect link) to benefit from individual Chinese investor demand that more than makes up for the loss of demand from US investors resulting from a delisting of ADRs. A shares (tech-oriented in particular) trade at a premium to both H shares (Hong Kong-listed) and in many cases US stocks. We expect the increased demand from individual Chinese investors (as well as reduced exposure to US sanctions mechanisms because of the new shareholder makeup), all else equal, to more than compensate for lost demand from investors that might be limited to US exchanges.
Alec Jin, investment director of Asian equities
Last week’s development is unsurprising. Going forward, we would expect to see more Chinese companies voluntarily delist from US exchanges and pursue primary listing status in Hong Kong going forward. We have already seen a number of US-listed Chinese firms establish secondary listings in Hong Kong to mitigate delisting risks.
The Hong Kong Exchange has been progressively relaxing its listing requirements, allowing more Chinese companies to establish a listing there. Broadly, it remains to be seen what transpires from ongoing discussions between US and Chinese regulators. We believe that a compromise between the US and Chinese regulators could be reached with an aim of maintaining efficient and well-functioning global capital markets.
China still has room to support growth at a time when policy conditions are tightening in all other major economies, making it a real counter-cyclical opportunity globally. This recognition is reflected in improved investor sentiment and performance of both onshore and offshore Chinese equity markets, which have rebounded in the latter half of H1, after [performing] significant weaker earlier this year.