However, this could be your last warning – a dark cloud over US-listed Chinese stocks could lead to a storm that washes away investors’ money, even those who are well-heeled. passive investment through mutual funds.
Recent moves by both the Chinese and US governments could put Chinese stocks traded in the US at risk of being delisted in the next three years. If that happens – and it’s still a big if – experts say the typical American investor could be left out when the music ends.
The law was passed by the National Assembly at the end of last year require US-listed foreign companies to agree to audits within the next three years or face delisting by US stock exchanges, part of a multi-year effort in Washington , DC to address the lack of rights of US investors in these stocks.
With that happening, the Chinese government has launched its own attack on listed US stocks. In the first day of this month, Chinese government has blocked new users from downloading apps from Didi Global Inc.,
Uber Technologies Inc.
of China, just weeks after its IPO on the New York Stock Exchange. On Thursday, a Bloomberg News report says China is looking for another way to punish Didi, including the ability to delist or force state-owned investors on the ride-hailing company, as its stock is down more than 25% from its IPO price.
If China’s moves drive down Didi’s share price and force new investors into the company, it would resemble the scenario Jesse Fried, a law professor at Harvard University, presented to MarketWatch last year. early last week. Essentially, he sees an opportunity for China to lower the prices of these companies before wealthy Chinese investors buy them privately at a lower price.
“Chinese companies listed here often go private. People who control a company they intend to go private can deliver bad news and hold back the good news so the stock goes down, and then buy back the company’s stock at a very low price,” Fried said. “This is not only happening with Chinese private companies, but also with American companies. It won’t happen with a company like Alibaba TORTOISE, this is too big for private, but it can happen to smaller companies. ”
One example he gives is Qihoo 360, which like most Chinese IPOs is located in the Cayman Islands with a structure that leaves US shareholders with no real say. In late 2015, the company announced a deal made privately by a group of investors led by CEO Zhou Hongyi, who has a 61% stake. The go-private deal valued Qihoo at around $9.3 billion, but after being headquartered in Shanghai, its shares surged to a $56 billion valuation in 2017. Fried noted in this article in the Harvard Law School Forum on Corporate Governance that Quihoo’s CEO made $12 billion alone maintaining the company.
The valuations of most US-listed companies are huge, but have fallen since Didi felt the wrath of home., especially those that have gone public in recent years following the resounding success of Alibaba’s IPO. Prominent examples include iQiyi Inc.
known as Netflix Inc.
of China, which has fallen by more than 18% in the past month; Pinduoduo Inc. online shopping app.
down more than 11% in the past month and over 40% so far this year; and online real estate concern KE Holdings Inc.
fell more than 23% over the past month, through Thursday.
However, that is not an exhaustive list. As of May 5, according to the US-China Security Review Commission, there were 248 Chinese companies listed on these US exchanges with a total market capitalization of 2.1 thousand billion USD. In the first half of 2021, according to Dealogic, 37 Chinese companies have listed shares in the US, surpassing 36 deals for the whole of 2020.
Many China experts, including Fried, believe that there will be more negotiations between the two countries to prevent the worst-case scenario from happening to investors.
“My deep sense is that China will try to gain some accommodation with the US government. For now, China wants to keep the US market open and available to these fledgling Chinese companies, which China’s undeveloped capital markets cannot fully support,” Fried said. “And while Congress loves to shake up anti-China sentiment, Wall Street is still very much interested in keeping this pipeline open, given the huge IPO fees. “
However, excitement has grown in the war between the US and China in recent years, and the two sides have very different motives in this fight. China, an authoritarian Communist regime that wants to control every aspect of day-to-day life in the world’s most populous country, is also clearly looking to block Chinese currency issuance in the US, and somehow get a piece of cake.
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“Two things are happening here,” Harry Broadman, managing director at Berkeley Research Group, wrote in a recent email, ahead of the latest Didi news. “Beijing is concerned about data security but not because it wants to protect data or people’s privacy, but because Beijing wants to maintain its monopoly over people’s data. Information is power, and Beijing doesn’t want other people to have these kinds of data that could in principle be used to cause instability.”
But now, since the United States passed legislation sponsored by Senator John Kennedy (R, Louisiana) late last year that requires foreign companies that have listed shares in the United States to allow inspections. audit in the next three years, the clock is ticking. It also represents an opportunity for US investors to get out while they can.
“Since the Kennedy bill was passed, the clock ticks again,” said Lynn Turner, senior counsel at Hemming Morse LLP and former chief accountant at the Securities and Exchange Commission. The Foreign Holding Liability Act would require the SEC to ban trading of securities of foreign companies on U.S. markets after three consecutive years of non-examination, if the Public Accounting Oversight Board (PCAOB) determined that it was unable to examine the company’s audit papers. . However, that is the worst case scenario that many people do not expect.
Shaswat Das, an attorney at King & Spalding in Washington, DC, who served as chief negotiator for PCAOB with Chinese regulators from 2011-2015, in an email. “Despite the escalating tensions between the US and China in a number of areas, the passage of the law by the SEC and PCAOB and its implementation could really bring both sides… back to the bargaining table once again. There is so much to lose for both sides.”
But China’s ultimate goal appears to be twofold: for the shares of major growth companies to be traded back in the country, under Communist Party supervision, and for good regulation or prediction. than sketchy or fraudulent companies like Luckin Coffee LKNCY published here.
At some point in the future, Fried believes, “The Chinese government will either stop letting PCAOB check, or come up with another plan to move all these companies back to China, once the market is out. China’s own capital is developed enough.”
He noted that if the Chinese government refuses to cooperate with PCAOB, some companies may turn to private operations and then may rely elsewhere, such as on exchanges in Singapore, Hong Kong. or London.
While many retail investors are excited about the China market and the potential from these stocks, passive investors could also be hurt, as China is an important emerging market. for many fund managers.
“We’ve always determined that there are risks to these companies that some accountants don’t understand, some regulators don’t understand, and some investors don’t,” said Jeff Mahoney, an advisor. General Council of Institutions said Investors, or CII. “Our members are largely passively invested. Most of them invest in companies through index investing.” CII issue white paper explaining risks to investors in the structure of Chinese companies that will list shares in the US in 2017.
Turner notes that CII has been warning investors about problems with these companies for years, but given the huge returns, major asset managers aren’t overly concerned about the risk.
“I talked to some of the biggest people, and asked them why you invest in these things, sooner or later the chicken crowed home,” he said. “Their view is that until that happens, and we make enough money, we will keep doing it. We’re going to charge a lot of fees on it, and when it’s turned upside down, that won’t be our problem.”
Turner said he believes most major hedge funds have Chinese listings in the US, from Fidelity Investments to Vanguard. “Those funds need to be pushed very hard on their strategy to get rid of Chinese companies that are facing delisting, if things don’t change,” he said.
While passive investors face risks, the real damage can be for retail investors betting big on momentum stocks like Pinduoduo, NIO Inc.
or a bunch of other Chinese companies. Some investors may have begun to worry. Year-to-date, as of last week, Dealogic said the aftermarket performance of IPOs in China fell 2.76%, compared with a 13.5 percent increase last year.
Turner believes there is too much risk for investors in this sector. “I think American investors would be wise to hold on and not invest in any new Chinese companies, until we see this develop more over the next few years.”
With new US law in effect and potential delisting, investors could have up to three years to test their portfolios and take profits. But even if China and the US reach an agreement in which auditors can view the books of US-listed companies, that won’t necessarily prevent Luckin Coffee’s follow-up. The wisest move might be to get out while you still can.
https://www.marketwatch.com/story/this-is-your-final-warning-chinese-stocks-listed-in-the-u-s-are-dangerous-to-hold-11626978306?rss=1&siteid=rss | Opinion: This is your final warning — Chinese stocks listed in the U.S. are dangerous to hold