By Wei Hongxu
On August 12, 2022, amid the escalating financial conflict between the U.S. and China over the future of Chinese stocks listed in the U.S., five Chinese state-owned enterprises (SOEs) including China Life Insurance Company, PetroChina Company Limited, China Petroleum & Chemical Corporation, Aluminum Corporation of China Limited, and Sinopec Shanghai Petrochemical Company Limited announced their delisting from the New York Stock Exchange. Although later there was a swift resolution to the audit dispute regarding Chinese stocks, creating room for them to maintain their status, the process of Chinese central SOEs delisting from the U.S. has not halted. It is reported that by the end of this year or early next year, central enterprises like PetroChina will complete the delisting process, bidding farewell to the U.S. capital market.
Much like the previous delisting of the three major telecom carriers including China Unicom from U.S. stocks, the recent delisting of these five enterprises has not had a significant impact on their operations and business, and there is no substantial influence on their stock prices in both the A-share and Hong Kong markets. The reason lies in the relatively low proportion and trading volume of their U.S.-listed shares. Looking ahead, whether through privatization or transferring to the Hong Kong Stock Exchange, the delisting of these U.S.-listed stocks does not bear substantial consequences for the enterprises.
In the long run, this severs the connection between Chinese SOEs and the U.S. capital market, meaning these enterprises will no longer be able to seek further financing from the U.S. stock market. Departing from the U.S. capital market may bring some inconvenience to the future international investment, merger, and acquisition activities of such enterprises. However, for the current “cash-rich” central SOEs, their financing focus will shift back to the “A+H” shares, making their development more reliant on domestic funds. From a financial perspective, Chinese enterprises are increasingly less dependent on the U.S. capital market.
However, in terms of corporate governance, the formation of long-term corporate development strategies, and the exploration of investment opportunities, the U.S. capital markets still play a significant role as a reference and guide. After delisting, these SOEs will still face substantial challenges in corporate reform and thus need to maintain appropriate openness and communication mechanisms to avoid a closed-door approach.
Regarding the direct reasons for the delisting of Chinese central SOEs from the U.S., which is the evolving dynamics of the audit dispute between the two nations, the voluntary delisting of these enterprises from the U.S. has effectively removed obstacles for the two countries to reach a quick compromise, providing room for Chinese concept stocks, mainly driven by private capital, to continue staying in the U.S. capital market. Therefore, looking at the focal points of the U.S.-China audit dispute and the root causes of cross-border data flow, the data held by central enterprises involve critical information such as China’s strategic petroleum reserves, mineral distribution, energy usage, insurance and financial assets, all of which relate to China’s core national interests. Hence, it’s challenging for the audit data of these central state-owned enterprises to be exported. In the case of these enterprises voluntarily delisting, other Chinese concept stock companies, primarily private enterprises, have room to compromise with U.S. audit authorities.
On the U.S. side, the voluntary delisting of these SOEs also indicates that the U.S. capital markets are not indispensable for Chinese companies. Using this as leverage to drive the U.S.-China financial war does not yield significant benefits. In this context, it effectively led to a dramatic compromise in the audit dispute.
Currently, the progress of cross-border audits is still proceeding smoothly, and there have not been significant obstacles to regulatory cooperation between the two sides. After all, the U.S. market also needs more good investment targets, which has led to a tolerant and accommodating attitude towards most privately-owned Chinese concept stock companies. This also reflects that the idea of “financial decoupling” from China is not in line with the interests of the U.S. financial sector. Chinese concept stock companies continue to generate substantial profits for their asset owners. Such development reflects the geopolitical and political attributes behind the previous U.S.-China audit dispute. This also shows that the issues of Chinese concept stocks, which were once a source of controversy, have gradually become less significant.
Against the backdrop of China’s economic growth slowing down and the economic recovery falling short of expectations, the stock prices of Chinese concept stocks, mainly internet companies, have generally declined this year. On the other hand, the stock prices of central SOEs such as PetroChina, which are about to complete the delisting process, have shown an upward trend due to rising energy prices. This not only reflects that Chinese companies delisting from the U.S. have not been significantly affected by the U.S.-China financial decoupling, but it also implies that the focus of U.S. politics on the financial war has shifted. On the one hand, it leans toward encouraging U.S. capital to avoid investing in Chinese assets and decoupling from China. On the other hand, shorting the Chinese stock market and Chinese concept stocks seem to be becoming a new trend for U.S. capital.
In the context of U.S.-China geopolitical competition, despite Chinese SOEs being unwelcome in the U.S. capital market, as long as China maintains openness to international capital and effectively utilizes Hong Kong’s status as an international financial center, Chinese state assets can still serve as targets for international capital investment. Additionally, these SOEs should not become closed off as a result of this situation. They still need to maintain sufficient openness to enhance their competitiveness, face competition both in the Chinese and international markets and earn investor recognition through their own capabilities.
Final analysis conclusion:
The process of Chinese state-owned enterprises delisting from the U.S. capital market, which began in August last year, will gradually be completed by the end of this year or the beginning of next year. Even with the agreement and effective resolution of the U.S.-China audit dispute, these SOEs will continue to leave the U.S. stock market. For the delisted companies, there is not much substantial impact, but there exist certain long-term concerns. Whether state-owned or otherwise, these enterprises should maintain openness in their development and avoid proactive closure due to external pressures.
Wei Hongxu is a researcher at ANBOUND