Shang-Jin Wei says Beijing’s move to steadily intensify the regulatory scrutiny of its largest technology companies, and the unabated US-China tensions have prompted investment restrictions and legislation that would put pressure on the New York Stock Exchange (NYSE) to delist Chinese tech companies. The delisting is in line with an executive order signed by Trump after losing his bid for reelection. It bans Americans from investing in Chinese companies owned or controlled by the Chinese military and security services.
The author says, a “recent flurry of official measures” in both China and the US “suggests that the two governments are not keen on Chinese firms retaining their US stock-market listings.” Beijing believes that remaining on the US market would be of little value for their businesses, considering that their trading volumes are very small. Besides, the delisting of Chinese companies would not have too much of a direct impact on the NYSE itself.
Since China seems intent on decoupling its companies from Western markets, “the effects of delisting these often fast-growing companies may be easily manageable for both countries.” There are around 250 Chinese firms listed on major US stock exchanges, and they are “more enthusiastic than most” about trading on US equity markets. “Many Chinese technology firms also had little alternative to listing in the US before 2018. But the situation today is different.”
According to the author, “Chinese authorities once tacitly encouraged US listings, viewing them as a symbol of China’s embrace of the global capital market.” In the past, “many Chinese firms chose to list in New York instead of Shanghai or Shenzhen because their foreign private-equity or venture-capital investors wanted to avoid China’s foreign-exchange controls. Moreover, China has much tougher listing requirements and a long and uncertain waiting period for regulatory approval.”
As these tech firms “derive most of their revenue and profits from mainland China,” they have to be in Beijing’s good graces. Given the increasingly tough environment, more and more of them will be reluctant to list on US stock markets. Beijing hopes that it would undermine America’s capital markets, and weaken its role as global financial leader. A delisting of dynamic Chinese tech firms would “reduce returns for many middle-class US households whose pension funds are restricted to investing only in US-listed securities, and US stock exchanges will lose business.”
The author says, the US allows different classes of shares to have different voting rights…… Most countries regard a divergence between voting rights and cash-flow rights as facilitating bad corporate governance, because it potentially allows controlling shareholders to enrich themselves through self-dealing at the expense of other investors.” Even if Chinese firms are delisted, “US hedge funds, mutual funds, and rich individuals” can still invest in Chinese firms listed in Hong Kong, and even – albeit less conveniently and straightforwardly – those listed in mainland China.”
Since ordinary Americans “would not connect lower returns on their pension funds to delisting of Chinese firms, US politicians are unlikely to face a backlash. And that fact could make delistings more likely.” However, the Public Company Accounting Oversight Board (PCAOB) has proposed a framework for implementing a new law - the Holding Foreign Companies Accountable Act (HFCAA) - passed in December. Companies that fail to comply with American auditing standards for three years in a row can be delisted from US exchanges. Beijing currently does not allow the PCAOB to examine the audits of Chinese firms whose shares trade in America, citing national security concerns.