China delistings threaten $190 billion US fundraising boom

The worry for US companies is that their access to China's vast economy could be curtailed in any escalation of tit-for-tat sanctions.
The worry for US companies is that their access to China's vast economy could be curtailed in any escalation of tit-for-tat sanctions.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - For more than two decades Chinese companies have turned to the US stock market for capital and international prestige, raising at least US$144 billion (S$190 billion) from some of the world's largest investors.

Now this pillar of China's integration with the global financial system is increasingly under threat.

The latest blow arrived on New Year's Eve, when the New York Stock Exchange said it would delist three state-owned telecom companies to comply with Donald Trump's November order barring US investments in Chinese firms determined to be owned or controlled by the military. It's the first time an American exchange has removed a Chinese company as a direct result of rising geopolitical tensions under the outgoing Trump administration.

While the impact on China Mobile and its two peers is likely to be minimal given the bulk of their shares trade in Hong Kong, the delistings underscore the risks for both Chinese and US companies as tensions between the superpowers simmer. China's largest offshore oil producer fell in Hong Kong on Monday (Jan 4) amid speculation its US shares may enter the crosshairs next. President Trump signed legislation with bipartisan support last month that could kick more Chinese firms off US exchanges unless American regulators can review their financial audits.

"There is bound to be a cost to Chinese companies from being shut out of the US or being delisted," said George Magnus, a research associate at Oxford University's China Centre and author of "Red Flags: Why Xi's China is in Jeopardy." A listing in the US "looks a less attractive proposition nowadays, particularly if you're a state-owned enterprise with close links to the People's Liberation Army or internal security," Mr Magnus said.

The worry for US companies is that their access to China's vast economy could be curtailed in any escalation of tit-for-tat sanctions. Wall Street banks are particularly keen to see a ratcheting down of tensions after gaining unprecedented scope to operate in China last year. China's securities regulator responded to the delistings by calling them groundless and "not a wise move," though it didn't outline any plans to retaliate.

NYSE said it will suspend trading in the American depositary shares of China Mobile, China Telecom Corp and China Unicom Hong Kong before Jan 11. In his executive order, Mr Trump said the companies were among those directly supporting the Chinese military, intelligence and security apparatuses and aiding in their development and modernization.

China Unicom and China Mobile said they're reviewing ways to protect their "lawful rights." China Telecom said it's considering options to "safeguard the legitimate interests of the company."

The affected shares are worth less than 20 billion yuan (S$4.1 billion) and account for at most 2.2 per cent of the total shares in each company, the China Securities Regulatory Commission said in a statement on Jan. 3, adding that the companies are well positioned to handle any fallout.

The firms' American depositary receipts sank in New York trading Monday, led by China Telecom's 5.5 per cent drop to the lowest since 2003. China Mobile fell 5.9 per cent to a 2006 low, and China Unicom slipped 3.2 per cent. Oil majors were mixed after an initial decline.

China Mobile was among the nation's first major companies to sell shares in the US, part of a "red chip" boom in 1997 that fizzled as the Asian financial crisis took hold. The IPO performed poorly on its debut, but nonetheless heralded a flood of Chinese listings in the US over the coming decades.

The combined market value of China-domiciled companies with at least a portion of their shares traded in the US now stands at upwards of US$1.9 trillion, a list that includes blue-chip names from Alibaba Group Holding to NetEase and JD.com. Chinese companies raised a record US$36 billion from US initial public offerings and follow-on share sales in 2020, data compiled by Bloomberg show. Companies backed by international venture capital firms often prefer US listings to those in China, which are subject to the nation's capital controls.

While the figures suggest many companies have shrugged off the risk of delistings, others have been making backup plans. Alibaba, JD.com and NetEase are among those that have added secondary listings in Hong Kong since late 2019.

Speculation that more may follow suit sent shares of Hong Kong Exchanges & Clearing Ltd. up 4 per cent to a record on Monday. Oft-cited candidates for secondary listings include Pinduoduo, a fast-growing e-commerce company that listed in the US in 2018, and Baidu, the search engine operator that debuted on the Nasdaq in 2005.

Chinese President Xi Jinping has also been trying to boost his country's domestic equity markets in Shanghai and Shenzhen, with a raft of recent reforms to attract tech companies that had historically flocked to New York. Jack Ma's Ant Group was due to become the highest-profile addition to Shanghai's much-touted Star board, until the IPO was abruptly shelved by regulators in November.

The outlook for further delistings may depend in large part on how US-China relations evolve after president-elect Joe Biden steps into the White House later this month. While Mr Xi said in a congratulatory message to Mr Biden in November that he hopes to "manage differences" and focus on cooperation between the world's two largest economies, few expect tensions to ease anytime soon.

"We don't know as to how the Biden administration will pick up the baton that's been left by the Trump administration," Oxford University's Mr Magnus said. "There will certainly be a transition cost to China if the mood in the US remains sour."