On July 29, the United States Securities and Exchange Commission (SEC) put four Chinese companies, including Alibaba, MOGU, Cheetah Mobile, and Boqii Holding on the watch list of companies that could be delisted for failing to comply with auditing rules. Since March this year, the SEC has successively placed 159 Chinese companies including Baidu, JD.com, Bilibili, and Pinduoduo on the list. Among them, 153 have been transferred to the definitive list because they could not prove that they are not eligible for delisting within the deadline. The number of existing Chinese concept stocks in the U.S. is roughly 280, most of which have been included in the pre-delisting list.
Under the U.S. Holding Foreign Companies Accountable Act (HFCAA), these companies will be delisted from the U.S. capital markets if they fail to achieve direct audits in 2024. This makes the future of Chinese concept stocks in the U.S. to be closely related to the negotiations on U.S.-China audit cooperation. As things stand, the relevant prospect is not determined by the market. Under the intensification of the competition between the U.S. and China, the future of Chinese concept stocks listed in the U.S. will be full of uncertainties.
Judging from the current progress, the negotiations on audit issues between the two countries do see some progress. Both sides expressed their willingness to discuss differences in cross-border audit cooperation, hoping to reach an agreement to continue being listed in the U.S. Moreover, China has made a number of concessions, as well as revising and promulgating some rules to remove certain institutional obstacles. At the same time, some media said that China may conduct hierarchical management of data security issues, and data that does not pose national security risks can be used as audit papers for review by the United States.
However, for the U.S., this is still far from fulfilling its audit requirements, and it still insists that audits should be reviewed without restrictions. Although the differences between the two sides have narrowed, there is still a considerable gap between the cross-border audit methods accepted by both. From a technical point of view, it is still feasible to reach an understanding of disputes over auditing issues, yet on the one hand, under the current general background, there is little room for both parties to make concessions. On the other hand, some internet giants will not be able to accept the inspection as they involve in high-risk data. As the red line of time set by the U.S. is getting closer, the possibility of Chinese stocks being forced to delist is becoming more and more likely.
Researchers at ANBOUND pointed out that in the context of U.S.-China competition, when the U.S. considers China as its foremost strategic competitor, it has become a general trend to promote the decoupling of the U.S.-China economy. This signifies that the decoupling tendency of the Chinese and U.S. capital markets will become increasingly apparent. The U.S., in the present condition, has become more and more hostile to American investors investing in Chinese companies. Under such circumstances, a number of Chinese firms have been systematically "expelled" from the U.S. capital market. Even if the two sides can reach some form of agreement on the audit issues, rising geopolitical risks will still drive the trend toward the direction. This is determined by the general framework of the geopolitical relationship between the two countries. Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC), also stated that China would strengthen international cooperation in the capital market to ensure smooth exit channels for overseas listings. Such a statement is an indication that Chinese stock companies need to prepare to "return to China".
When it comes to capital market performance, the uncertainties of the prospects of Chinese concept stocks have affected the market value of most Chinese concept stocks as well. After the SEC announced the first batch of lists on March 10, 20 Chinese concept stocks fell by more than 10% on that very day, where iQiyi's stock price even fell by 22%. On the day that Alibaba was included in the watch list, as of the closing, Alibaba's stock price plummeted by more than 11% to USD 89.37 per share, bringing the cumulative decline in July to 21.4%. As a matter of fact, in the past two years, the entire Chinese concept stock group has continued to be under pressure. Taking Alibaba as an example, on October 23, 2020, its U.S. stock price reached the high of USD 309.92 per share, but by August 1 this year, it fell to USD 89.37 per share. Compared with the previous high, it fell by 71.16%. This downturn in market value is certainly due to market and industry changes, and such a widening gap with large U.S. technology stocks actually shows that policy risks are fatal to Chinese stocks. According to an infographic of the Chinese financial media outlet Jin10 Data, on April 27, 2020, Apple's worth was roughly equivalent to the combined valuation of 5 Chinese tech firms; two years later the market value of Apple has become not only comparable to 54 Chinese tech firms but there is also a surplus of USD 1.26 trillion. Under the shadow of an unpredictable future, the market value of Chinese concept stocks has already shown a historical low, which also makes listing in the U.S. even less attractive to businesses.
Currently, more and more Chinese concept stock companies have begun to prepare for exiting the U.S. market. Recently, Alibaba announced that it will pursue a dual primary listing to transit its status to primary listing, and seek to become a Hong Kong stock company. Prior to this, NIO was listed on the main board of the Singapore Exchange Securities Trading Limited, being the world's first smart electric vehicle company listed in the U.S., Hong Kong, and Singapore. Based on data released by the Hong Kong Stock Exchange (HKEX), 27 Chinese concept stocks have returned to Hong Kong stocks in different forms, of which 5 are listed after privatization and delisting; 6 are dual listings; 16 are secondary listings. Although in terms of quantity, there are not many Chinese concept stocks that have "returned" in various ways, in terms of market value and scale, it is quite significant. These companies have accounted for 96% of the total market value of ADRs in China. Among the dual-listed Chinese concept stocks, the proportion in Hong Kong is increasing. The Hong Kong-listed portion of dual-listed companies has increased from 48% of outstanding shares to 53%, with share conversions concentrated in JD.com, Alibaba, and Li Auto, according to data from the HKEX's Central Clearing System. Under the strategic competition between the United States and China, the return of these Chinese concept stocks and the transfer of transactions mean that the American and Chinese capital markets are actually "decoupling". This also signifies that the return of Chinese concept stocks has become a major trend.
The improvement of the Chinese capital market environment has in fact created conditions for the return of Chinese concept stocks. Ernst & Young's industry report pointed out that in recent years, the uncertainty of foreign capital markets has increased, and U.S. supervision has become more stringent. At the same time, Hong Kong's investment and financing environments continue to optimize, while the reform of HKEX's listing system has relaxed the conditions for the secondary listing of Chinese concept stocks in Hong Kong. These factors in turn jointly catalyzed the return of Chinese concept stocks. For TMT companies, their application scenarios are rooted in China. The continuous favorable policy environment in China and the value recognition of TMT high-tech companies by the capital market are also crucial driving forces for the secondary listing of TMT Chinese concept stocks in Hong Kong.
It has become a clearer trend that Chinese stock companies have now actively or passively returned to China's capital market. Researchers at ANBOUND believe that from the current geopolitical situation and the trend of U.S.-China relations, it is not impossible for the U.S. and China to decouple in certain areas. There are many indications that it will become more and more common for Chinese companies to withdraw from the U.S. stock market. This trend will break the long-formed U.S.-China cooperation model of "U.S. venture capital + Chinese companies + U.S. stock market listing" and further exacerbate the decoupling in the financial sector.
Final analysis conclusion:
With the increasingly intensified geopolitical competition between the United States and China, even if the two countries can reach an agreement on audit disputes, Chinese concept stocks will face huge policy and market risks in the U.S. market. The return of Chinese stock companies from the U.S. capital market will become a major trend, and the final result will be a substantial financial decoupling between the U.S. and China.
