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Trade war

Disclose or leave: US bill vows to delist even biggest Chinese players

Alibaba moves for secondary listing in Hong Kong as decoupling deepens

Traders work on the floor at the New York Stock Exchange. The proposed Senate bill threatens to delist Chinese companies if they do not comply with tougher American regulations.   © Reuters

NEW YORK -- Chinese companies may reconsider their U.S. listings after lawmakers in Washington introduced a bill that could see foreign groups expelled from U.S. exchanges, analysts are warning.

The move by Alibaba Group Holding -- which scored the biggest ever IPO five years ago in New York -- to seek a secondary listing in Hong Kong could be one of the first in a wave of Chinese companies to examine their options as tensions mount in the trade battle between Washington and Beijing. Sources have said Credit Suisse and CICC are sponsors to the deal, which is expected to raise as much as $20 billion.

Paul Gillis, a professor at Peking University and an expert on accounting in China, said in an online post that he expected the bill "has a good chance of passing, and that will start the three-year countdown for negotiations, or for the companies to find another listing home. I expect most of them will move their listings to Hong Kong." 

The bill is the latest demonstration of Washington's readiness to exert pressure on some of China's biggest companies, as well as to decouple the world's two largest economies.

Introduced by a bipartisan group of senators last week, the bill states that foreign companies will face delisting from U.S. exchanges unless they grant American inspectors full access to their audit reports -- something Beijing has blocked in the case of Chinese companies. Enforcement would follow a three-year grace period beginning in 2025.

Several newly listed stocks in Hong Kong have fared poorly on listing in recent weeks as weak broader market conditions amid the U.S.-China trade war dampened investor enthusiasm. (Photo by Ken Kobayashi)

The bill's sponsors include Republican Marco Rubio of Florida, known as a China hawk, and Democratic presidential candidate Kirsten Gillibrand of New York.

"Beijing should no longer be allowed to shield U.S.-listed Chinese companies from complying with American laws and regulations for financial transparency and accountability," Rubio said in a statement. "If China-based companies want to list on stock exchanges or access capital markets in the U.S., we should make them comply with American laws."

Rubio has been calling for the delisting of China-based companies that do not comply with U.S. law since last year. China, however, considers such audits to be confidential information.

The Senate bill would impact U.S.-listed Chinese businesses across the board, including some of the world's biggest tech players, such as Alibaba, Baidu and JD.com. Chinese companies listed in the U.S. held a combined market capitalization of $1.2 trillion as of Feb. 25, according to the U.S.-China Economic and Security Review Commission.

Strategists at Bank of America Merrill Lynch said there is a "moderate risk" that some Chinese companies will choose to delist their American Depositary Receipts even before the bill was introduced. 

"In an April letter, a bipartisan group of senators urged the Trump administration to increase disclosure requirements for Chinese companies listed in the US ... This could have been one factor behind SMIC's recent decision to delist from the NYSE, by our assessment," the strategists said in a note on June 4.

Semiconductor Manufacturing International Corp., as it is known in full, is China's largest chip foundry. The company said in May it was delisting from the New York Stock Exchange due to "limited trading volume" and "the significant administrative burden and costs of maintaining the listing."

Alibaba's widely reported secondary listing in Hong Kong comes as the group faces pressing funding needs, as its efforts to diversify from core e-commerce together with a softer economic growth have weighed on profitability and cash flow. The group is keen to "attract more investors, particularly those from mainland China," said Martin Bao, an analyst with ICBC International in Hong Kong. 

But Chinese tech companies are keenly aware they could be targets for the U.S. in its battle with Beijing on trade. 

The U.S. Commerce Department cited national security risks in adding Chinese company Huawei Technologies to its so-called Entity List last month, a move that essentially bans exports to the privately owned telecom equipment supplier.

Washington reportedly is considering the same treatment for Hangzhou Hikvision Digital Technology, a state-owned camera provider linked to Beijing's mass surveillance in China's northwestern region of Xinjiang. Many American institutional investors have sold off Hikvision's stock.

China's central government denies access for the U.S. Public Company Accounting Oversight Board to inspect company audits done by an auditor registered in the country. China and Belgium are the only two countries refusing such access, according to the board, which conducts the inspections for the purpose of protecting investors.

"A lot of the rhetoric today, I'm sure, emanates from people's frustration in [China] not making more progress," said Drew Bernstein, partner at MarcumBP, a New York-based accounting firm that serves many Chinese companies listed in the U.S. "Things like inspections -- those are good for all investors."

Many Chinese companies have discounted valuations compared with American peers because investors lack confidence in their financials, Bernstein said.

"The lack of inspections is a definite negative for investors," he said.

The accounting oversight board, the China Securities Regulatory Commission and China's Finance Ministry had signed a memorandum of understanding in 2013 for "mutual assistance and exchanging information" in order to promote security compliance. Yet in practice, the U.S. oversight board said last September that it remained barred from conducting inspections in China.

China's reluctance to permit such access for American regulators could involve its state-owned enterprises listed in the U.S. Beijing holds a stake of 30% or more in at least 11 companies listed on the three major American exchanges, the U.S.-China review commission says.

The Senate bill provides a long buffer period for compliance, but still poses immense challenges to Chinese companies if they were to delist. Taking these businesses private or relisting would require a large amount of capital that could be hard to secure elsewhere.

"Chinese companies definitely have more choices today" as the Hong Kong and Shanghai exchanges have altered their rules, Bernstein said. But the U.S. market has "this enormous pool of highly diversified capital. That's not so easily replaceable."

Coco Liu in Hong Kong contributed to this report.

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