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NetEase attributed its decision in part to the need for more funds, which it wants to use to expand its business. But he also made it clear that he believes the United States is becoming more hostile to Chinese companies, as regulators and lawmakers consider new rules that would lead to more severe scrutiny. Some restrictions may even make it harder for companies to go public or continue to trade in New York.
The enactment of such rules “could cause investor uncertainty for affected issuers, including us, the market price of our [US shares] it could be adversely affected, and we could be removed from the list if we are not able to “qualify,” NetEase wrote in documents filed with the Hong Kong Stock Exchange.
The recognition of NetEase is a sign of how much the relationship between the United States and China has deteriorated, and how much is at risk for Chinese companies that do not develop a viable backup plan.
Other companies are also considering Hong Kong
“China’s tech giants see Hong Kong as a middle ground,” said Brock Silvers, chief investment officer at Adamas Asset Management, based in Hong Kong.
He added that the city is “under Chinese control, but still with access to the US dollar.” Unlike mainland China, where there are strict restrictions on capital entering and leaving the country, Hong Kong allows capital to flow more openly. The city’s currency is also freely convertible.
NetEase will also not be the last company to look at Hong Kong. According to data provider Refinitiv, some 37 Chinese companies qualify to do so, based on their market capitalization, amount of revenue, and ability to comply with regulations.
Baidu and Trip.com declined to comment. But Baidu founder and president Robin Li recently suggested that his business could turn to Hong Kong if necessary.
Evolving motivations
But Beijing has been loosening some of those restrictions in recent years as part of an effort to get Chinese companies back home. The country is trying to improve its position as a great technological superpower, and the closer some of its most precious companies are, the more influence the government will have on them.
“The political calculation that led Chinese tech companies listed in the United States to search for secondary listings was originally Beijing’s desire to put those companies under its bureaucratic control,” Silvers said. “But it has evolved in light of the trade war and the subsequent decoupling.”
But that bill would only compel those companies to withdraw from the list if they couldn’t be audited for three consecutive years, according to analysts at Goldman Sachs.
However, even the potential for stricter regulatory scrutiny “is likely to accelerate its double-listing trend in the [Hong Kong] market, “Goldman analysts wrote in a recent report.
The pressure also comes from the Trump administration. Secretary of State Mike Pompeo praised Nasdaq on Thursday for proposing new compliance rules that could affect Chinese companies, adding that other exchanges should consider similar regulations.
Pros and cons in Hong Kong
“We believe that the [Hang Seng] it will undergo a similar change in the coming years and will become an index that primarily reflects the growth of new economic enterprises in China, “they wrote.
Alibaba, after all, has been a great success story for the city. The company’s Hong Kong-listed shares have risen 19% since they started trading last November.
“Other firms are following suit,” said Hong Hao, managing director and head of research at Bank of Communications International in Hong Kong. “It’s worth having a Plan B.”
However, Trump’s announcement did not include any specific sanctions related to Hong Kong’s financial sector. And the Hong Kong dollar’s peg to the US dollar appears to be secure for now: City authorities assured investors this week that they have enough reserves to maintain the peg, keeping the city’s currency trading within a narrow and stable band.
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