Delisting China Stocks?

I’m been trying to make sense of the U.S.-China escalating tension. I believe we are in a cold war. It’s been brewing in the dark for years, each player placing their pieces, trying to get optimal positioning once it breaks out. The cold war is being fought on many front. There’s a trade war, a tech war, an economic war, a covid war, a political system war, and there’s the Hong Kong issue (and Taiwan). Washington is considering a range of sanctions against Chinese officials and firms as punishment for Beijing’s crackdown on Hong Kong. The world is being forced to choose between the U.S. or China, just like the world had to choose between the Soviet Union or America. The list of issues is long. Often, for an successful oversea company trying to growth, going to the NYSE or Nasdaq would make sense. 

I’m trying to assess the U.S. threat to delist Chinese stocks. Are they dumb crazy? Is it just politics? Or does it make sense?

  • Over the years, American investors have been pumping billions of dollars into Chinese firms listed in the U.S., from giants like Alibaba (BABA) and Baidu (BIDU). Investors have been able to profit from the explosion of e-commerce in China, even though the likes of Facebook and Amazon.com Inc. are largely shut out of China.
  • Recent admissions of accounting fraud at Luckin Coffee have prompted heightened scrutiny of U.S.-listed Chinese companies.
  • There’s a threat to evict some 170 Chinese companies listed in the U.S.
  • The move is more than just political. China, uniquely among major world economies, bars the U.S. Public Company Accounting Oversight Board (PCAOB), from monitoring corporate audits, considering that a national-security risk. Chinese audits are done on a completely different basis.
  • The Senate passed a bill giving all Chinese companies three years to let the PCAOB in, or be kicked out of U.S. markets. It will likely clear the House.
  • Rumblings about China companies not playing by the same rules have been around for years. The bill will force Chinese companies to abide by the same accounting rules as U.S. companies listed on the NYSE and Nasdaq.
  • The bill will also require public companies in the U.S. to disclose whether they are owned or controlled by a foreign government, including China’s communist government.
  • China declares states secrets in not allowing full transparency of corporate books, especially those with heavy state involvement.
  • Why close the books? Probably what they find won’t be pretty. Opening corporate records could reveal embarrassing links between the nation’s leaders and valuable share packets. Stuff that they don’t want to come out.
  • The question now is whether we will see Chinese companies give in to the new rules or relocate outside the U.S.
  • Two of China’s most valuable U.S.-listed companies, NetEase (NTES) and JD.com (JD) are pushing ahead with multibillion-dollar share sales in Hong Kong.
  • Chinese stock can thrive without a primary U.S. listing, look at Tencent. If you have a good company, you will likely find capital.
  • Despite the issues with Chinese companies, attracting capital is one of the U.S.’s major force. It’s very important that they keep that advantage. I bet London and Singapore is looking for take advantage of the dispute.
  • The U.S. instead should have policies to attract listings and capital. One idea is hiring high quality annually-inspected US audit firms.
  • Companies with good oversights and financial control would probably trade at a premium. Investors prefer companies that have oversight.
  • It’s important for any company to play by the rule. I don’t think the idea of crippling Chinese capitalism by denying it a listing will work. It’s probably good domestic political firework, but it won’t amount to much. It will probably hurt the country by pushing companies to look elsewhere.
  • Despite the issues, the U.S. and China should work out their problems. It’s what’s best for everyone’s interest. They need each other. They depend on each other.
  • China should play by the same rules as everyone. The U.S. should go back to the principles of what made them great.
  • Get each country’s top three negotiators and send them on an island to work it out behind doors.

Thanks for reading and have a good weekend,

Brian

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