How could the delisting of Chinese companies from the American stock exchanges proceed?

THESES DAYS politicians in Beijing and Washington seem to agree on very little. However, about the end of the listing of Chinese companies on the American stock exchanges, they are in an unusual harmony. The collapse last year of Luckin Coffee, a Nasdaq-listed Chinese beverage delivery group that was caught inflating sales, has reignited political grievances in America. The result was the Holding Foreign Companies Accountable Act, which requires companies listed on US stock exchanges to undergo audits or be delisted within three years. The precise rules are still being drawn up, but will probably lead to a major load shedding in the long term.

China, for its part, seems happy that its companies are leaving US markets. Its regulators seemed indifferent when their shares demolished the share price of Didi Global, a Chinese rideshare company, just days after its New York IPO. New rules by the country’s cyberspace watchdog will make it more difficult for some businesses to register outside of China. A sudden rule change in late July made online tutoring companies serving school-aged children ineligible for overseas enrollments, wiping out billions of dollars from several Chinese stocks traded in New York.

As rare as this moment of Sino-US agreement is, it hardly heralds good news for investors. The US market is now home to $ 1.5 billion of Chinese companies. This type of market value has never been shunned by exchanges before. So what kind of harm could delisting cause shareholders?

The fact that Chinese companies continue to do business in New York is remarkable. For a decade, Beijing and Washington have been arguing over the fate of China’s U.S. certificates of deposit (ADRs), as the stocks of foreign companies doing business in America are called. As a wave of accounting scandals at Chinese companies listed in New York began to hit the markets in 2011, US regulators began to insist on access to certain accounting records. The Chinese authorities have been relentless, refusing the requests and even making document sharing a crime.

There are actions for which radiation is not necessarily painful. Many ADR the contracts indicate that investors can convert those shares into corresponding securities listed on other exchanges, notes Wei Shang-Jin of Columbia Business School. Some of the largest Chinese companies have been prepared and are pursuing secondary listings in Hong Kong to which shares can be transferred. It started with BeiGene, a biotech group, when it launched a secondary listing in Hong Kong in 2018. Alibaba, which raised $ 25 billion in New York in 2014, held a second listing in Hong Kong in 2019. to raise an additional $ 11 billion. Of the 236 Chinese companies listed in New York, 16 have secondary listings in Hong Kong, with a combined market capitalization of $ 980 billion.

The situation looks darker for shareholders of other companies. Stock prices will be pulled down by the potential for instability. (The Nasdaq Golden Dragon China Index, which tracks Chinese companies listed in New York, is down 45% since February.) This will give managers and other company insiders a chance to buy back shares from U.S. shareholders at cheap, says Jesse Fried of Harvard Law School. Companies could potentially be re-listed in China or Hong Kong at much higher valuations, but initial investors in the ADRs will not see a dime of the relist. And shareholders are unlikely to have the right to review the valuation at which companies are private, notes Shaswat Das of King & Spalding, a law firm.

There is an even worse case. Some companies may simply “go out,” which means they stop reporting to US regulators and get delisted without any buyouts. It might sound far fetched, but it has happened before. In the aftermath of the accounting scandals of ten years ago, more than 100 Chinese companies disappeared from the New York stock exchanges, destroying some $ 40 billion in market value. Many have not compensated investors. And shareholders in general are unlikely to recoup their losses: because most Chinese groups have few assets in America, an angry shareholder seeking legal recourse should go to a Chinese court, says Joel Greenberg of ‘Arnold & Porter, another law firm.

It is therefore wise not to be caught holding these shares as the delisting approaches. But here’s the catch. Ten years ago, experts also focused on cross-border registrations for Chinese groups. The market capitalization of Chinese companies listed on the US stock exchanges has since increased tenfold.

This article appeared in the Finance and Economics section of the print edition under the title “Cease and delist”