As the U.S.-China relationship deteriorates and bipartisan support for a tougher position against the world’s next big market grows in Congress, U.S.-listed Chinese firms might be among those to view blowback this season.
Transparency into Chinese firms has been a longstanding issue, with China barring the U.S. Public Company Accounting Oversight Board, or PCAOB, by visiting corporate audits–explaining that as a national security risk. Myriad Chinese companies have recorded on U.S. exchanges for years, including heavyweights like
Alibaba Group Holding
(ticker: BABA) and
(JD). But as momentum to have a tougher stance on China and reassess the U.S. relationship with the nation grows, Congress has been moving toward delisting businesses which don’t comply.
Many Chinese companies have in recent months sought secondary listings in Hong Kong, such as Alibaba,
(NTES) and JD.com, while China’s largest chip manufacturer,
Semiconductor Manufacturing International Corp
Oration, delisted last year.
The proposal to delist businesses has passed the Senate and is awaiting a vote by the House. In a video briefing with customers, Gavekal Research’s Arthur Kroeber stated there is”a very good chance” that laws requiring Chinese companies to fully meet U.S. accounting oversight standards will pass the House, and if it does, then it is almost certain that many Chinese companies need to delist in the U.S. For the most part, Kroeber expects most companies to relist in Hong Kong instead of Shanghai to maintain tapping global liquidity.
Over the longer-term though, some policy watchers are concerned the delisting push might be the beginning of other restrictions on outbound investment in China as the U.S. rethinks its relationship with China on multiple fronts outside trade and technology. Derek Scissors, a resident scholar at the conservative think tank American Enterprise Institute, said there is precedent for such constraints –including the capital controls which did not allow free investment in the Communist bloc. Some constraints, when tied to coverage, are potential next year, regardless of who wins the election, while he says there’s a cost to such restrictions\.
The most obvious stocks which could take a short-term strike could be the most well-known companies, like Alibaba, which is frequently used as a China proxy. But fund managers state Alibaba–along with many others who have secondary listings in the works–might be a buying opportunity, while those with no secondary listing could face more challenges.
Bank of America
Highlighted Chinese ADRs by value growth and core large-cap supervisors. Barron’s screened the list farther to find the biggest companies by market cap and those that had logged the biggest gains so far this year to get a dozen ADRs that could be at risk for volatility, at least at the near-term, in case delistings come to fruition.
BofA Merrill Lynch US Equity & Quant Strategy/FactSet
Write to Reshma Kapadia at firstname.lastname@example.org