Chinese companies facing setback in the United States are hedging their bets in Hong Kong

Chinese companies facing setback in the United States are hedging their bets in Hong Kong

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.

At least a handful of companies trading in New York already seem to be considering it. E-commerce company (JD) It received approval from the Hong Kong Stock Exchange for a secondary listing in Hong Kong and presented a prospectus that was released on Friday. Bloomberg has reported that the company could start trading as soon as this month. Tech companies Baidu (BIDU) and (TCOM) he may be considering similar plans, according to various Chinese media reports.

Baidu and declined to comment. But Baidu founder and president Robin Li recently suggested that his business could turn to Hong Kong if necessary.

“In fact, we are paying close attention to the strict regulations of the US government on Chinese companies,” Li said. he told the state newspaper China Daily last month. “We are internally discussing what we can do to deal with it, including a secondary list in Hong Kong.”
A woman wearing a face mask walks past an electronic dashboard of the bank showing the Hong Kong stock index on the Hong Kong Stock Exchange on Tuesday.

Evolving motivations

New York has long been an attractive option for foreign companies to go public. Wall Street has the world’s largest stock exchanges and the ability to leverage massive amounts of investment capital. For Chinese companies, a listing in New York also allowed them to avoid strict IPO rules in China, including banning companies with certain types of shareholding structures.

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.

Alibaba's homecoming is all about pleasing China and buying trade war insurance
The desire to impress Beijing was widely cited as a big reason for Alibaba’s decision to list in Hong Kong last fall, although analysts also pointed to tensions between the United States and China and the need to mitigate political risks as a substantial factor as well.

“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.”

It is not entirely clear how quickly the possible new US rules. USA They could create problems for Chinese companies trading in New York. A bill that has not yet been passed by the US House of Representatives. For example, the USA is intended to force those companies to open their books US regulators: A condition weathered by Beijing, which requires companies trading abroad to keep their audit documents in mainland China where they cannot be examined by foreign agencies.

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.

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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.

“American investors should not be subject to undue and hidden risks associated with companies that do not comply with the same rules as US companies,” said Pompeo. he said in a statement. “Nasdaq’s action should serve as a model for other exchanges in the United States and around the world.”

Pros and cons in Hong Kong

A wave of secondary listings could also greatly benefit Hong Kong’s financial markets, where long-standing stability has been threatened for the past year. anti-government protests, a greater invasion of Beijing and the growing tensions between the United States and China.
The United States could end its special relationship with Hong Kong. But for western companies, it's complicated
Jefferies analysts, for example, recently suggested that the Asian financial center benchmark Hang Seng Index (HSI) it will eventually have a “complete makeover” as more Chinese internet companies go public in Hong Kong, eliminating more city-focused stocks such as banks and real estate firms. Such an “emigration list” could add almost $ 560 billion to Hong Kong’s market capitalization and raise $ 28 billion in capital.
In a recent research note, Jefferies analysts compared the Dow Jones Industrial Average (INDU) al Hang Seng, saying that the New York index has outperformed the Hong Kong benchmark because of its willingness to replace “stagnant” companies with “successful and high-growth” ones.

“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.

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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.”

Trading in Hong Kong is not without risks. The city has become a flashpoint in the confrontation between Washington and Beijing: President Donald Trump said last week that the United States wants to end their special economic and commercial relationship with Hong Kong, which could jeopardize the status of the city as an international business center.

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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About the Author: Cory Weinberg

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