Investors swap China holdings from Wall Street to Hong Kong

SHANGHAI • Global fund managers are reducing their holdings in US-listed Chinese companies such as Alibaba, NetEase and JD.com as risks grow that they will be forced off American exchanges, switching instead into shares of the companies listed in Hong Kong.

Delisting risks surfaced last September when President Donald Trump's administration explored moves to kick Chinese firms off Wall Street unless they abide by US accounting standards, part of an escalating stand-off between the world's top two economies.

The threat is now real. The Holding Foreign Companies Accountable Act has been passed by both chambers of the US Congress and should soon be signed into law by Mr Trump. Once this happens, foreign issuers in the United States that decline a review of their audits for three years can be delisted.

Since most Chinese companies are prohibited by mainland laws from disclosing information that might be considered state secrets, they are often unable to comply with such audit reviews, making them vulnerable to delisting.

"It's always something you're aware of as a potential risk. Now that risk is really becoming a reality," said Mr Brian Bandsma, a New York-based portfolio manager at Vontobel Asset Management.

He added that he has started moving positions in American Depositary Receipts (ADRs) of Chinese companies towards Hong Kong. There are two paths, he said, and he is taking a slower but less costly route.

Mr Nicholas Yeo, head of China equities at Aberdeen Standard Investments, said his fund is making adjustments too. "Listing venue doesn't really matter. For the sake of prudence, we just buy the same companies in the Hong Kong market. The shift is quite easy."

An increasing number of Chinese companies have secondary listings in Hong Kong, giving investors an alternative.

US-listed Chinese firms, including Alibaba, JD.com, NetEase, Yum China and New Oriental have already floated in Hong Kong.

More than 20 other ADRs - including Pinduoduo, Vipshop and Bilibili - are also eligible for a Hong Kong secondary listing, according to Morgan Stanley.

Mr Brendan Ahern, chief investment officer at New York-based Krane Funds Advisors, believes most conversions so far have come from Asian and European investors who want to align themselves with their investor base.

Singapore's Temasek said in September that it had swapped half its stake in Alibaba - worth about US$3 billion (S$4 billion) - from the US to Hong Kong.

Matthews Asia told investors in July that it owned Chinese firms such as Alibaba through both US and Hong Kong listings.

For US investors, there is also the option of trading Chinese firms such as Tencent in the less liquid over-the-counter market.

Mr Ahern believes China and the US will eventually come up with a plan to avoid wholesale delistings that could affect over US$2 trillion in American savings invested in US-listed Chinese companies.

"(We) will not stand idle as we have a fiduciary obligation to protect our investors," he said, adding that the firm had done a test conversion of Alibaba's US shares to Hong Kong shares, proving the process is "exceptionally easy".

Fund managers say US and Hong Kong-listed shares are completely fungible, with little price difference or cost. Still, in a worst-case scenario, a large exodus of Chinese companies would affect investors and reduce competitiveness of the US capital markets, a lawyer who works with an ADR depositary said on condition of anonymity.

"If you take away prominent successful companies from US exchanges, it will make London or Hong Kong or both stronger and will create a perception that now there are possibly better choices than US exchanges."

REUTERS