Investors brace for delisting of U.S.-listed China stocks By Reuters

© Reuters. Signage is seen on the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C., U.S., May 12, 2021. Picture taken May 12, 2021. REUTERS/Andrew Kelly

By Samuel Shen and Selena Li

SHANGHAI/HONG KONG (Reuters) -As a long-running Sino-U.S. diplomatic spat threatens to power Chinese firms off American inventory exchanges, world fairness traders are assessing methods to retain or add publicity to the world’s second-biggest financial system.

Fund managers are planning or accelerating a shift out of Chinese American Depository Receipts (ADRs) into their Hong Kong-listed counterparts, or shopping for extra shares listed on the mainland. Some activist traders are going so far as urgent U.S.-listed Chinese firms not but listed in Hong Kong to take action as quickly as attainable.


Meanwhile, retail U.S. traders with no entry to Hong Kong’s markets have begun dumping Chinese ADRs after the U.S. Securities Exchange Commission this month finalised guidelines to kick non-compliant Chinese firms off American exchanges in three years.

“It seems like we’re taking place the observe the place these firms might be delisted from the United States,” mentioned Thomas Masi, New York-based accomplice and fairness portfolio supervisor at GW&Ok, citing lingering tensions between the world’s two greatest economies.

Washington is demanding full entry to the books of U.S-listed Chinese firms, however Beijing bars international inspection of working papers from native accounting corporations – an auditing dispute that places lots of of billions of {dollars} of U.S. investments at stake.

Goldman Sachs (NYSE:) estimates 1 / 4 of the $1 trillion market worth of China ADRs is with American traders.


The guidelines are forcing a rethink. GW&K’s Masi mentioned the asset supervisor is reviewing its retail-focused ADR technique “to see in the event that they do have long run viability.”

Individual U.S. traders flocked out of Didi Global after the Chinese ride-hailing firm unveiled plans on Dec.3 to withdraw from the New York Stock Exchange and pursue a Hong Kong itemizing.


The uncertainty has additionally brought about a close to halving of the market capitalisation of Chinese ADRs over the 12 months, to about $828 billion, Refinitiv Eikon information confirmed.


The technique for GW&K’s rising market fund, which owns shares in Chinese firms together with Alibaba (NYSE:) and Group, is to swap out of ADRs into their Hong Kong-traded shares, however solely when liquidity within the latter improves, Masi mentioned.

Brendan Ahern, chief funding officer of KraneShares, mentioned he’s additionally able to make the shift when the time is ripe.

“We’ve bought our finger on the set off to make that migration,” Ahern instructed traders in a webinar, held after the SEC guidelines and the Didi delisting announcement despatched Chinese tech shares tumbling. “We’re not going to face idle and watch these firms go away.”

The New York-based, China-focused asset supervisor, which runs a $7.5 billion exchange-traded fund (ETF) monitoring China web stocks together with U.S.-traded JD (NASDAQ:).com, has examined conversions into Hong Kong listings and located them operationally easy.

“You merely inform your custodian, you wish to make that conversion. The ADR custodian financial institution fees like 4 cents a share to make that conversion … in a single day, your U.S. names grow to be the Hong Kong share class.”


According to accounting agency EY, 5 of the highest 10 Hong Kong listings in 2021 have been secondary listings of U.S-listed Chinese firms together with Baidu (NASDAQ:) and Bilibili (NASDAQ:) Inc.

“U.S-listed firms coming house is the large development,” mentioned Lawrence Lau, EY Greater China Financial Accounting Advisory Services chief. “If in the future, their shares can not change arms within the U.S., Hong Kong can function a security internet platform the place their shares can nonetheless commerce usually.”

So much of firms have already accomplished that, making life simpler for traders.

Aaron Costello, Beijing-based regional head for Asia at funding consulting agency Cambridge Associates, notes that 12 of the 15 largest U.S.-listed Chinese firms have already got a secondary Hong Kong itemizing and these firms comprise roughly 85% of the market worth of China ADRs within the MSCI China index.

Nuno Fernandes, accomplice and portfolio supervisor at GW&Ok, mentioned he’s urgent firms that are lagging.

“We’re having energetic conversations with the administration of these firms, and we’re sending them a transparent message: it is your obligation to pursue all of the alternatives to dual-list in Hong Kong as quickly as attainable,” he mentioned.

Many firms have accomplished so, so people who haven’t “higher have an excellent reason they don’t seem to be dual-listed but. And how they plan to unravel it.”

Philip Li, investor director at Wellington Management Co, concurred: “the worst case state of affairs can be that an ADR can be delisted and have nowhere else to go.”


Some traders are going on to China’s more and more deregulated home market.

Catherine Hickey, vice-president at consultancy Segal Marco Advisors, mentioned most of the rising market managers it makes use of now have a tendency to speculate straight into Chinese firms by way of the A-share market, which is more and more open and liquid.

So if there have been fewer ADRs “it would not make that a lot of a distinction.”

Morgan Stanley (NYSE:) additionally recommends publicity to China-listed A-shares, whereas expressing warning in direction of the MSCI China index, which has roughly one-fourth of its weightings in ADRs.

“In the subsequent three years, we will see only a few IPOs of Chinese firms within the U.S., if any,” mentioned GW&K’s Fernandes.

“So by definition, the main focus goes to be extra on the mainland Chinese market, as a result of that is the place the IPOs are going to come back from.”

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