Chinese exodus from US exchanges not an unlikely scenario

The US is now back in the ring with its nemesis China for the second round. This time, the US administration has wasted no time in delivering a massive blow, despite being weakened by the pandemic.

To be fair, China has been asking for it. And the fallout happened after Chinese coffee chain Luckin Coffee (NASDAQ: LK) came under fire for the manipulation of sales figures by its management. The opaque nature of Chinese firms that disallowed US regulators to scrutinize its reports has been a major point of contention among investors. And Luckin Coffee showed exactly how disastrous this can be. The stock, which was touted as China’s answer to Starbucks (NASDAQ: SBUX) when it went public a year ago, has lost about 92% of its value since the incident.

According to the new act approved by the Senate last week, foreign companies listed in the US face a ban if their accounts are not inspected by the Public Company Accounting Oversight Board for three simultaneous years. It also requires the companies to state that it is not owned or controlled by the government of the respective country.

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Even though all foreign companies come under the ambit of the act, it is aimed at ensuring a higher level of transparency in Chinese firms. It still needs to go through the house and the president before becoming a law, but given the overwhelming support in the senate and investor community, there will be little resistance in both the levels.

But what are the implications?

Even though the move was long overdue, it’s arrival at a time Chinese companies are mulling listing closer to home makes it a double-edged sword. According to a Reuters report, Baidu (NASDAQ: BIDU) is already considering delisting from NASDAQ to float shares in a market where it has more brand recognition and value proposition. Baidu is one of the longest-standing US-listed Chinese stock, and if it goes ahead with this plan, it evidences the lack of value Chinese firms have been receiving in the US markets.

Alibaba (NYSE: BABA) is another example. It had a successful secondary listing in Hong Kong last year, offering great value and a shield from the effects of the US-China cold war. Already, companies including Netease (NASDAQ: NTES) and  JD.com (NASDAQ: JD) are considering following Alibaba’s path of secondary listing. If the whole atmosphere turns aggressive back in the US, these companies could even withdraw the listing entirely. A few other Chinese firms including Mindray Medical and Qihoo 360 have done so earlier.

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Welcoming markets

Flexibility and liquidity are the two main features luring foreign companies to the US exchanges. However, if they don’t get the right valuations, companies are likely to look for other options. Of late, European exchanges including London and Frankfort, as well as Hong Kong have become great alternatives to Chinese companies looking to raise cash. This poses a significant threat to the US.

Separately, investors are likely to come at the receiving end, if US-listed Chinese stocks make a tender offer to go private. These tenders could be considered at a lower value, eroding millions of investor money.  

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Maintaining the confidence of Chinese firms while ensuring transparency will be one hell of a balancing act. And hopefully the House will take into consideration such risks while taking a decision on the new legislation. As to investors, it’s probably a tricky time to invest in Chinese stocks.

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(Views and opinions expressed in this article are those of the author and do not necessarily reflect those of AlphaStreet, Inc.)