Though the U.S. and China have for now reached a stock delisting détente, Chinese firms are continuing to show interest in raising capital on European exchanges this year. As such, for the first time ever, Chinese companies have raised more in European capital markets than in the U.S., with the focus on the UK and Switzerland.
While U.S.-China tensions are heated in many areas, it appears that the two countries want to keep the bilateral relationship on an even keel when it comes to the financial services sector. Despite the sensitive politics on both sides of the conversation, the two countries have, for now, reached an agreement that should reduce the chance of a large-scale delisting of Chinese companies from U.S. stock exchanges.
We have heard a lot about Chinese companies potentially delisting en masse from the U.S.’s capital markets. Without an eleventh-hour deal between the US and China, that may be inevitable. The paramount long-term trend, however, is where they will go in the first place to raise capital internationally. Hong Kong is the most obvious choice, but there are also options in Europe thanks to the establishment of stock connect programs. To that end, with the launch of the China-Switzerland Stock Connect four Chinese companies have listed on the Six Swiss Exchange.
U.S.-China financial decoupling has been happening in slow motion and sometimes appears to be leveling off, allowing some observers to stay optimistic. In reality, however, it will not be easy for American and Chinese regulators to agree on a deal that allows Chinese firms to remain listed on U.S. stock exchanges. With that in mind, Alibaba recently announced it will pursue a primary listing in Hong Kong.
The government crackdown on China’s tech sector has had many far-reaching effects, among the most consequential the reorientation of the country’s capital markets ecosystem away from consumer-facing platform companies and towards a state-guided deal pipeline focused on strategic industries. E-commerce, fintech, ride hailing and home sharing are out, while advanced manufacturing, artificial intelligence, 5G telecommunications and renewable energy are in. Big-ticket mainland IPOs are becoming more common, especially with the advent of the Shanghai STAR board, China’s answer to the Nasdaq.
During China’s long tech boom, private investors availed themselves of the abundant opportunities afforded by Chinese IPOs, whether onshore, in Hong Kong or in New York. Yet with Beijing’s crackdown on the tech sector and persistent U.S.-China tensions, Chinese IPOs are going in a very different direction.
There is a growing list of Chinese companies that could be forced to exit U.S. stock exchanges under legislation passed in 2020. The legislation requires all public companies in the U.S. to comply with auditing requirements that Chinese companies have resisted due to Beijing’s own state secrecy laws. On March 30, the Securities and Exchange Commission (SEC) added Baidu to the list. A total of 11 Chinese companies facing delisting have been named so far.
Does China need yet another stock exchange? That has been the question of many of our minds since first hearing about the Beijing Stock Exchange, a rejigging of the existing over-the-counter New Third Board. It came about amid a push by Chinese President Xi Jinping to boost onshore capital markets and create an enduring fundraising channel for China’s chronically underfunded small and medium-sized enterprises (SMEs). To that end, the minimum market cap to join the Beijing exchange is just US$31.3 million, significantly less than China’s other exchanges.
It is hard to believe that during the first half of 2021 Chinese IPOs in the United States raised a record US$12.4 billion, per Dealogic’s estimates. That was the boom before the bust, which had been brewing for a long time but came to the fore with the disastrous debut of Didi Chuxing on the NYSE. Like Alibaba’s nixed IPO heralded a widespread regulatory crackdown on fintech, Didi’s is doing the same for Chinese IPOs overseas.
Hong Kong may be attracting the lion’s share of offshore listings by Chinese companies, but New York is no slouch. In fact, for all the talk of U.S.-China decoupling, the world’s most liquid capital markets retain significant appeal for Chinese companies. According to Dealogic, 36 Chinese companies had raised US$12.59 billion in U.S. markets as of June 30, a half-year record.
U.S.-China financial decoupling is an odd thing. Instead of a linear progression in which Chinese firms gradually eschew going public in the US and delist from its stock exchanges, we see some Chinese companies continuing to seek exits on the Nasdaq or NYSE, while others are seeking secondary listings in Hong Kong as a hedge against forced delisting. Still others are actually being forced to delist like the telecoms giant China Mobile, which is now looking at a new listing on the Shanghai Stock Exchange.
Before Ant Group’s IPO was nixed, the Shanghai STAR board was red hot. Since then, it has cooled off considerably. Not only is Ant’s IPO in limbo, but other Chinese tech companies are scuttling their plans to go public, one after the next. Ant is the bellwether for the market, whether it is a bull or bear. Data compiled by Financial Times show that 76 firms suspended their IPO applications in March, more than twice the number in February. Overall, 168 companies have put their plans to go public on ice since November.
To delist or not to delist: That is the question. The New York Stock Exchange (NYSE) could not seem to make up its mind earlier this month, delisting three Chinese state-owned telecoms stocks (China Mobile, China Telecom and China Unicom Hong Kong), reversing course, and then finally deciding that the three firms should be delisted after all. The professed reason for kicking the companies off the NYSE is they have ties Chinese military and threaten America's national security. The impact on their market capitalization will likely be limited as their trading volume is much higher in Hong Kong than New York. More forced delistings of Chinese firms could occur in the waning days of the Trump administration though.
The suspension of Ant Group's blockbuster IPO has cast a shadow over China's fintech industry as online microlenders scurry to figure out how to meet tough new capitalization requirements. JD Digits, the fintech unit of e-commerce giant JD.com, is one of the firms most affected by the nixed Ant IPO. JD Digits filed in September to list on the Shanghai STAR board, a deal that was expected to raise up to US$3 billion.