U.S.-China financial tensions flare anew

Written by Kapronasia || January 11 2021

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.

According to Bloomberg, large Chinese oil companies might be forced to delist, namely CNOOC. Like the telecoms, their trading volume is low in the U.S. because they have raised very little money there.

Forcing Alibaba or Tencent to delist would be a much bigger deal. They have a combined market value of US$1.3 trillion and are widely held by U.S. investors. There could be reputation repercussions for U.S. capital markets as well.

Still, the possibility cannot be dismissed. On January 6, President Trump signed an executive order banning transactions with eight Chinese apps, among them Alipay, WeChat Pay, QQWallet and Tencent QQ. The order seeks to prevent the apps from collecting private information from U.S. users.

It is unclear if the ban will be carried out by the Biden administration. It does not take effect until late February. Businesses with heavy exposure to the China market might also oppose it, as they did a similar order that targeted WeChat.

Of far greater importance is legislation that passed quietly in mid-December targeting Chinese firms that refuse to let U.S. regulators review their financial audits. The companies have a three-year grace period to comply with the auditing standards. If they cannot or will not, then they will be forced to delist from U.S. exchanges.

There is a lot of money at stake: 217 Chinese firms worth a total of US$2.2 trillion are listed in the United States, the U.S.-China Economic and Security Review Commission said in October.

Losing access to America's capital markets and dollar-based finance would hurt Chinese companies. To be sure, they could still raise capital from global investors in Hong Kong - and many certainly will - but the U.S.'s capital markets remain the world's deepest and most liquid. Being listed on the Hong Kong Stock Exchange does not yet carry the same prestige as being listed on the NYSE or NASDAQ.

Given the broad bipartisan support the legislation has in Congress, Beijing should not expect a reprieve from the Biden administration. Perhaps, however, Washington and Beijing can find a mutually agreeable way for Chinese firms to continue listing in the U.S. In November, the China Securities Regulatory Commission (CSRC) said that it looked forward to discussing with American regulators how to conduct joint inspections of U.S.-listed Chinese firms.

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