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Short seller Carson Block has gained notoriety for exposing the fraudulent accounting practices of Chinese companies listed in the United States. But the founder of Muddy Waters Capital now believes the days of Chinese companies tapping into US capital markets are over.
In an interview with Yahoo Finance Live, Block attributed the recent regulatory crackdown on China’s largest companies to Beijing executives accepting that delisting of its US-listed companies is “inevitable.”
“I think Xi Jinping said, listen, companies listed in the United States have to understand that they have to find another way to access the capital markets. Come back to the mainland, come to Hong Kong, but their days in the United States are numbered, ”Block said. “If Chinese companies are largely leaving the United States before the delisting mandate goes into effect, it sort of sounds like Xi’s domestic audience, as if Chinese companies have left the United States at their wit’s end. force, instead of being expelled. “
Congress passed a law last year that banned foreign companies from listing their securities on U.S. stock exchanges for failing to comply with U.S. rules for three consecutive years. The Holding Foreign Companies Accountable Act was enacted in response to concerns that Chinese companies were bypassing financial auditing by the Public Company Accounting Oversight Board (PCAOB), a congress of nonprofit corporations established in 2002, due to Chinese resistance to overseas inspections of its companies. ‘checks.
The law’s three-year grace period has forced Chinese companies to reconsider their options: complying with disclosure requirements that could put them in conflict with their country’s regulators, or moving their securities off U.S. stock exchanges.
“I always thought that China would give in at the eleventh hour on auditor inspections. And the reason I thought it was because so many [Chinese Communist Party] the officials have undisclosed stakes in these Chinese companies listed in the United States, ”Block said. “But I think Xi Jinping has decided not to give in to auditor inspections. And I think that’s because, right now, he has to perform in front of this national audience not to be intimidated by the United States.
Block said recent crackdowns on some of China’s biggest companies are proof of this.
Following the $ 4.4 billion IPO of ridesharing giant Didi Chuxing (DIDI) in June, Chinese cybersecurity regulators opened an investigation into the company and banned the application of accept new users, causing the fall of its shares listed in the United States. The Wall Street Journal reported that Beijing officials urged Didi to delay listing over concerns that the IPO documents required by the United States Securities and Exchange Commission (SEC) could contain information and material. sensitive data.
Last month, China-based tutoring companies New Oriental Education & Technology Group (EDU), TAL Education Group (TAL) and Gaotu Techedu Inc. (GOTU). saw their shares drop by more than 40% as regulators tried to exert control over the industry, calling on companies to become nonprofits.
Earlier this week, Tencent (TCEHY) was briefly overthrown as Asia’s most valuable company, after state media published an article calling online games “spiritual opium”.
Together, the regulatory upheavals have erased more than $ 1 trillion from the market value of Chinese stocks listed in the United States.
Regulatory compression
“I think from Wall Street’s point of view, from the point of view of the banks and the asset managers, they don’t like it because they want to keep selling the dream to American investors and paying the associated fees. to that, ”Block said. “Personally, I think it’s healthy if less US retail and retirement money is invested in these things. “
The scrutiny in China has come, as the SEC seeks to tighten the screws to protect US investors. Last week, SEC Commissioner Gary Gensler suspended all IPOs of Chinese companies, pending further information on the risks.
Block said regulatory squeeze will likely push more Chinese companies to seek listings in Hong Kong and mainland markets over the next three years. Many companies, including Alibaba (BABA), JD.com (JD) and NetEase (NTES) have already applied for secondary listings on the Hong Kong Stock Exchange.
But Block said he doesn’t believe the Hong Kong market has the liquidity to support a massive stock market recovery of Chinese stocks in the United States, leading to consolidation.
“I think your Chinese companies listed in the US Tier 1 will be able to find reasonable markets in Hong Kong, which means liquidity and so on. going to have problems, ”he said. “I think you can maybe start to see acquisitions over time of these level two companies by the level one companies because they – there’s not enough liquidity in Hong Kong.”
Akiko Fujita is a presenter and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita
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