Why Is US Delisting Chinese Stocks?

Why Is USA Delisting Chinese Stocks?

As straight as a Jalebi, this deal has managed to gain all the footage since New Year’s Eve. A derivative would be easier to understand when compared with this case of NYSE delisting the Chinese stocks. A rare event wherein NYSE has seemed as a flip-flopper, let us try and dissect the chunks of this not so simple case.

Crux of the Matter

But First, Terminologies

  • Delisting means the removal of listed security from a stock exchange, thus barring all further trades in that market.
  • Secondary Listing is when the company is listed on stock exchanges other than its primary listing exchange (market where its IPO was released).
  • American Depositary Shares (ADS) are equity shares of non-US Companies held by US Depositary Bank and are available for purchase to American investors.

The Turn Of Events
November 12, 2020: The executive order passed by Donald Trump banned US  investments in Chinese firms that are linked with the ‘military of People Republic of China’.

Trump claimed that Beijing is exploiting US Capital to finance the development & modernization of its military through its civilian corporates listed in US Stock Exchange. Moreover, China has never complied with the US Audit Standards reasoning them with national interest of Mainland and thus the Chinese firms lack financial transparency and accountability

The Delisting Plan
As per the November orders,  the New York Stock Exchange (NYSE) had decided to delist the stocks on New Year’s Eve.
The three telecom firms within gunshot were:

  • China Mobile Limited
  • China Telecom Corporation
  • China Unicom Hong Kong Limited

Changing Course

  • January 4, 2021: The NYSE announced that it is not going to delist the Chinese firms under the rubric that they had consulted with the relevant regulators.
  • January 6, 2021: NYSC again changed the plan and decided to carry on with the delisting of the Chinese telecom majors on January 11th. The decision came after Treasury Secretary Steven Mnuchin criticized the decision to grant pardon to the firms.

Aftermath

  • These Chinese firms made their secondary listing in the Hong Kong stock market. Thus, all international investors will still be accessible to the firm. 
  • Investments will now be going into HK’s Index instead of the US markets, whereas significant money inflow may still come from US investors.
  • The firms said that US investors who wish to continue investing can get Hong Kong Listed Shares in return to their American Depositary Shares (ADS) deposit in a predefined proportion. 

The Undecided Part
Will Joe Biden continue with this executive order or will he further reverse the decision? The question remains unanswered and so does the sustainability of this delisting. 

Curiopedia
  • The Shanghai Stock Exchange is one of the world’s largest stock markets by market capitalization at $4.0 trillion as of November 2018. Unlike the Hong Kong Stock Exchange, the Shanghai Stock Exchange is still not entirely open to foreign investors and often affected by the decisions of the central government.
  • The bid-ask spread is the difference between the prices quoted for an immediate sale and an immediate purchase for stocks, futures contracts, options, or currency pairs. The size of the bid-ask spread in, security is one measure of the liquidity of the market and of the size of the transaction cost. If the spread is 0 then it is a frictionless asset.
  • A ticker symbol or stock symbol is an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. “Ticker symbol” refers to the symbols that were printed on the ticker tape of a ticker tape machine.

Chinese Companies Face Brunt Of American Sanctions

Chinese Companies Face Brunt Of American Sanctions

Amidst increasing number of accounting frauds by listed companies, the US recently passed a bill to delist listed firms that do not comply with its auditing norms – a move that experts say is aimed at Chinese companies. Similarly, with the passing of the Hong Kong Security Bill by China, US has pushed for a bill to sanction lenders associated with the officials of that Bill.

Crux of the Matter

Holding Foreign Companies Accountable Act
In March 2020, the US Senate passed a bill titled ‘Holding Foreign Companies Accountable Act’. Under the ambit of this bill, companies are required to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three years in a row. If a company fails to do so, it will be delisted from all US exchanges. Moreover, public companies are required to disclose holdings by foreign governments in them.

Under the provision of this bill, Chinese companies – even the likes of Alibaba – are afraid of being delisted. Currently, 224 companies listed on US stock exchange are located in countries where PCAOB audits are not allowed – most of these companies happen to be in China. These companies have a combined capitalization of over $1.8 trillion

Many Americans invest in the US stock exchange as part of their retirement savings, and dishonest companies operating on the exchanges put Americans at risk. This legislation protects the interest of hardworking American investors by ensuring that foreign companies traded in America are subject to the same independent audit requirements that apply to American companies.

US Government

Chinese Companies Involved In Accounting Fraud
Luckin Coffee, a Chinese coffee-chain with 4,500 stores across China in just 3 years, listed on US exchange NASDAQ in 2019 with a $600mn IPO. It was found doing an accounting fraud. The company showed a higher number of orders per day by jumping order numbers on receipts. Muddy Waters Research, an investigative research and investment company, brought the matter into light. It shares plummeted 80% after it was found of $310 million fraud.

Another Chinese company which is in talks nowadays is GSX Techedu, an ed-tech company. GSX is accused of inflating its revenue by fabricating users. Research report published by Muddy Waters says that only 19% of its users are real. GSX reported a 432% revenue growth in a single year. Citron Research warned the US Securities and Exchange Commission (SEC) in the hope of investigation by authorities.

Sanctions After Hong Kong Security Law
China passed the contentious Hong Kong Security Bill. To put pressure on China, the US has introduced a bill to put sanctions on le ders associated with Chinese officials involved in the Hong Kong Security Bill. With this move, around $1.1 trillion of Chinese banks are at stake.

Curiopedia
  • The China Hustle is Netflix documentary that depicts systematic securities fraud that continues to occur in the United States, wherein small nondescript Chinese companies with possibly links to the CCCP, the Chinese Communist Party are hyped up and sold by American investment banks to U.S. based investors.
  • The Chinese Repository was a periodical published in Canton to inform Protestant missionaries working in Asia about the history and culture of China. It was the brainchild of Elijah Coleman Bridgman, the first American Protestant missionary appointed to China.
  • The Boxer Rebellion was an anti-imperialist, anti-foreign, and anti-Christian uprising in China between 1899 and 1901, toward the end of the Qing dynasty. It was initiated by the Militia United in Righteousness, known in English as the Boxers because many of their members had practiced Chinese martial arts, also referred to in the Western world at the time as Chinese Boxing.
  • The Singles Day, or Double 11, is a Chinese shopping holiday that originated as an unofficial holiday for bachelors. The holiday has become the largest offline and online shopping day in the world, with Alibaba shoppers exceeding $38.4 billion in purchases last year.