[Contribution] Chinese listed companies are coming home

Clive McDonnell (Standard Chartered Bank)

The Korea Herald is running a regular contribution series written by senior investment strategists at Standard Chartered Group Wealth Management. -- Ed.

Investors in Asia are cheering the prospect of more Chinese companies listed in the US seeking a dual listing in Hong Kong. The catalyst for the acceleration in this trend is legislation which is likely to pass through the US Houses of Congress.

The US legislation, Holding Foreign Companies Accountable Act, has two components that has raised alarm bells among Chinese companies listed in the US: 1) It closes the loophole that makes it difficult for the US Public Company Accounting Oversight Board to review the audited accounts of foreign-listed companies whose local laws prevent the handing over of accounting documents; 2) It will also require companies to confirm that they are not owned or controlled by a foreign government. Companies that are non-compliant could be de-listed from US exchanges.

While there is considerable focus on the negatives associated with the proposed legislation, it is worth noting that it could also result in better protection for investors in US-listed foreign companies against accounting fraud.

There are 150 companies listed in the US that are headquartered in China. Of these companies, 29, with an average market capitalization of $55 billion, currently meet the requirements for a secondary listing in Hong Kong.

Alibaba led the way with its dual listing in November 2019 and there is a large pipeline of other US-listed Chinese companies preparing for a dual listing in Hong Kong over the summer. Some have even spoken openly about de-listing from the US and pursuing a sole listing in Hong Kong.

The rationale for establishing an additional listing in Hong Kong is to tap into local investor appetite for Chinese technology companies. This was a reversal of the original logic for listing in the US which was to tap international investor appetite for those same companies. An additional driver is the Stock Connect system which enables Mainland Chinese investors to trade Hong Kong-listed companies that meet specific criteria.

It seems likely that the US Holding Foreign Companies Accountable Act will pass into law. We believe that this will result in two distinct trends. Chinese state-owned enterprises with US listings are likely to delist as they will not be able to meet the foreign government ownership restriction and are unlikely to be willing to open their books to the US regulator. Some of these companies already have a dual listing in Hong Kong. Secondly, it will accelerate the trend among the 29 eligible companies for a dual listing.

However, we do not expect the legislation to result in privately-owned Chinese companies delisting from the US, for the moment. There is likely to be considerable behind-the-scenes negotiation over the requirement in the act for the handing over of accounting documents. A compromise may be possible which will ensure private companies can adhere to the act.

The risk is a continued deterioration in relations between the US and China. In an election year, President Trump may pursue further measures that diminishes the attractiveness of the US as a listing venue for Chinese companies. If this prompts an eventual decision by US-listed Chinese companies to delist from the US, there are safeguards already built into the existing crop of dual-listed shares, whereby each US share is exchangeable for Hong Kong shares and vice versa. This reduces the risk of a sudden change in US policy leaving investors in Chinese American Deposit Receipts with stocks they cannot trade.

The Chinese companies preparing for a dual listing in Hong Kong over the summer are mostly fast-growing technology companies. Local investors are likely to cheer the possibility of investing in a wider universe of technology companies, in our view. Over time we expect the largest of these companies to join the Hang Seng index and eventually be eligible for Stock Connect, opening up this pool of fast-growing companies to Mainland Chinese investors.

By Clive McDonnell

Clive McDonnell is head of equity strategy at Standard Chartered Private Bank. The views reflected in the article are his own. -- Ed.