By Wei Hongxu*
Recently, the U.S. has again taken substantive actions on the supervision of China concepts stock. On March 10, the U.S. Securities and Exchange Commission (SEC) announced five companies that have been temporarily placed on the “pre-delisting list” under the Holding Foreign Companies Accountable Act (HFCAA), namely Yum China Holdings, Beigene Limited, Zai Lab Limited, HUTCHMED (China) Limited and ACM Research. The China Securities Regulatory Commission (CSRC) responded immediately to the matter that night, saying that it would continue to communicate with the U.S. side; the companies involved have also said they are actively seeking a solution. However, the SEC’s move once again triggered a sharp decline in U.S.-listed Chinese stocks.
In the midst of financial competition between China and the United States, Chinese concepts stocks have seen their market value plummet, and are expected to see an accelerated decline in March. A total of USD 326.09 billion was wiped off the market value of 323 U.S.-listed Chinese companies in the first nine trading days of March, according to statistics from Chinese media cls.cn. Based on the closing price on March 11, 209 or 64.5% of U.S.-listed Chinese companies have seen their share prices fall by more than 80% from their highs. Among them, Tencent Music and China Life Insurance Company fell 89% from the high; DiDi and Bilibili fell 88% from the high; KE Holdings and Futu Holdings fell 87% from the high; Sohu, Vipshop, Weibo, Tianyin Pharmaceutical, etc. fell 85% from the high. With the intensifying of geopolitical competition between China and the U.S., these China concepts stocks are facing the risk of delisting in the future, suffering from plummeting stock prices, and gradually losing the significance of maintaining their status as listed companies in the U.S.
The issue regarding China concepts stocks stems from a dispute between the United States and China over the auditing of listed companies, as tracked by ANBOUND. The U.S. side wanted to audit these companies directly, while the Chinese side has not allowed companies to provide relevant audit documents abroad for the sake of information security and audit sovereignty. During the “honeymoon period” of U.S.-China cooperation, the regulatory authorities of both sides have been tacitly agreeing and compromising on this issue due to common interests. Some Chinese companies took advantage of this gray area of supervision and committed violations such as information disclosure and financial fraud, further aggravating the contradiction. Against the backdrop of changes in U.S.-China relations and geopolitical competition, the U.S. adopted the Holding Foreign Companies Accountable Act (HFCAA), which sets a red line for relevant disputes. This means that if the audit dispute cannot be resolved, a large number of U.S.-listed Chinese companies will have to be delisted from the U.S. capital market around 2024. At present, the SEC has placed several companies on its “pre-delisting list”, which is its substantive action to enforce the relevant laws. Judging from the market’s reaction, the plummeting market capitalization of China concepts stocks means that the market sees a growing possibility of China concepts stocks being delisted.
What then, are the problems that U.S.-listed Chinese companies will face in the future? Will the U.S. and China capital markets be completely “decoupled”? These issues are of great concern not only to a large number of Chinese companies hoping to go public and raise capital, but also to investors. They not only affect the economy, trade, investment, and other fields of China and the United States, but also have a profound impact on the future development and layout of companies. Researchers at ANBOUND have noted that conflicts and disputes between the U.S. and China in trade, science and technology, and finance will increase as geopolitical competition between the two countries intensifies. The same cannot be avoided with respect to the capital markets of the two countries, which will gradually move toward a state of relative disengagement in the future. With the increasing geopolitical risks, future changes in the international environment, policy environment, and market environment will continue to compress the space of China concepts stocks. Even if some companies can continue to exist in the U.S. capital market, the direct connection between U.S. and Chinese capital markets will be weaker in the future, and China’s capital market will gradually move towards a new pattern dominated by geo-circulation.
As far as the current situation is concerned, although the tension between China and the U.S. has eased somewhat compared with the tension during the Trump administration, the Biden administration’s policy toward China is still positioned in a competitive manner. This means that the gray areas of compromise and tacit understanding between the two sides in the past will gradually disappear. It will then become challenging for both sides to compromise and cooperate on the audit dispute. China has repeatedly expressed its attitude towards audit sovereignty, data sovereignty, and information security in the revision of the securities law and the formulation of rules on data security. There is not much room for compromise in this. The U.S. also lacks flexibility in dealing with the audit dispute because of the Holding Foreign Companies Accountable Act and its rules on investor protection. Most importantly, there is the lack of motivation for cooperation between Chinese and American regulators under the context of U.S.-China strategic competition. These are the main reasons for the gloomy outlook for China concepts stocks.
Even if some agreement can be reached between American and Chinese regulators on auditing issues, the policy risks associated with increasing restrictions on Chinese financial investment and sanctions against Chinese companies will cause investors in the U.S. market to stay away from China concepts stocks. With this, the valuation and trading of China concepts stocks will be affected as a result. In the long run, such market conditions will gradually reduce the incentive for Chinese companies to go public in the U.S. At present, some Chinese companies have started to re-list in the Hong Kong market to avoid the risk of being “zeroed out” in terms of their market value. It is a choice companies have to make in order to stay in business.
A complete decoupling of the financial sector between China and the United States would not only be detrimental to Chinese companies, but also to the financial services industry dominated by the U.S. After all, Wall Street’s financial institutions, including investment banks, venture capital, and mutual funds, remain deeply engaged in the Chinese economy and markets. However, in the case of increasingly intensified geopolitical competition, the capital market connection between China and the United States needs a new geopolitical equilibrium to support. Despite the gradual separation of direct capital market ties between the U.S. and China, each will continue to seek new ways to link capital markets in the new geopolitical landscape to meet the needs of financing and investment of both sides. Hong Kong, Singapore, or other places will likely serve as intermediaries for such connectivity based on geopolitical ties.
*Wei Hongxu, A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK