Some of China’s most valuable public companies could abandon their American stock listings within months, experts have warned, after reports emerged that Beijing is planning a wider crackdown on tech companies going public overseas.
The development means that more than $2tn (£1.5tn) of capital invested in the US shares of Chinese companies could be at risk.
Reports on Friday suggested that Beijing was about to take further action against tech firms that deal with sensitive customer data, by forcing them to seek formal approval for initial public offerings (IPOs) outside China.
It is seen as Beijing’s latest effort to reverse a permissive regulatory regime that until recently allowed companies tosidestep local regulations in order to seek foreign investment.
The news, which was first reported by the Wall Street Journal, comes weeks after it emerged that American regulators planned to increase scrutiny of Chinese companies hoping to launch IPOs in the US.
Together, the pressure from those policies is likely to have dealt a fatal blow to plans for a New York IPO of the video app TikTok’s US division. Its parent company, ByteDance – last valued at $180bn – has also been considering a Hong Kong listing.
Investors fear an eventual wave of delistings of Chinese companies from US exchanges if the global crackdown continues. “It’s not only possible, it’s likely,” said Jay Ritter, a professor at the University of Florida’s Warrington College of Business, adding that delistings could occur en masse “within a matter of months”.
The exit of Chinese titans from New York’s exchanges could impact trading and sentiment across global stock markets. “In general, those ripple effects are never good because they have unintended consequences,” said John Byrne, an analyst at GlobalData.
There is precedent for such a move. About a decade a go, more than 100 Chinese companies delisted from US markets after a spate of accounting scandals sparked additional investor scrutiny in North America, and caused the share prices of Chinese companies to drop.
“When the prices fell, a number of those companies decided that the attractiveness of being listed in North America wasn’t as great as it had been, and they delisted and instead typically relisted in China. So there are precedents,” said Ritter, who is known as “Mr IPO” for his extensive work on the subject.
According to the United States-China Economic and Security Review Commission, a US governmental agency, approximately 248 Chinese companies, worth a combined $2.1tn (£1.5tn), were listed on US exchanges as of May. While that pales in comparison with the approximate $46tn market capitalisation of the entire US market, the potential impact could be huge.
Much depends on whether Chinese companies end up fully cancelling their shares, in a process sometimes referred to as “going dark”, or taking advantage of depressed share prices to buy out foreign stockholders at a fraction of their original value.
Investors have grown pessimistic. A sell-off of shares has sent the Nasdaq Golden Dragon Index, which tracks Chinese firms listed in New York, down nearly 50% since February.
Last month, regulators launched an investigation into Chinese ride-hailing app Didi’s handling of customer data, just days after it floated on Wall Street. The truck-hailing firm Full Truck Alliance and the online recruitment platform Boss Zhipin have also been caught up in regulatory scrutiny. And last November, shares in major firms such as online retail group Alibaba, Tencent and JD.com all tumbled after Beijing released draft plans to “prevent and stop monopolistic behaviours” of internet platforms.
Now China is taking aim at overseas listings. Ritter said Beijing was probably trying to deal with the embarrassment of having so many prominent companies like Alibaba traded in the US rather than in Shanghai. “It would be kind of similarly embarrassing for the UK if British Petroleum, or some other very prominent British company, said, ‘Well, you know, London isn’t good enough for us,’” he said.
Companies including Alibaba and Tencent have traditionally used a corporate structure known as variable interest entity – which has been in place for roughly two decades – to list overseas and gain access to foreign investment. However, the China Securities Regulatory Commission (CSRC) could reportedly force firms to seek approval for overseas listings from a cross-ministry committee involving China’s internet watchdog and the CSRC itself.
