D.C.-Beijing tensions are shifting markets
U.S. markets stand to lose $2 trillion in value if D.C. and Beijing drift further apart.
Why it matters: Political chasms are showing up in new securities regulations that put companies and investors in a bind. The rules are also another reflection of how much relations between the world’s largest economies have cooled, even as they remain economically interdependent.
Driving the news: Ride-hailing giant Didi is preparing to delist from the New York Stock Exchange and to relist in Hong Kong following pressure from Chinese regulators.
- It’s the first — with more than 200 others potentially at risk for delisting — as Chinese and U.S. regulators simultaneously pull and push Chinese companies out of U.S. markets.
The details: SEC rules laid out last week require Chinese companies listed in the U.S. to face audits or risk delisting within three years — an escalation of a nearly two-decade old requirement.
- Meanwhile, Beijing’s financial regulators are readying rules that will make it more onerous and costly for Chinese tech startups to list outside of China.
The backdrop: D.C., over the past five years, has cracked down on Chinese businesses and executives over national security and human rights concerns.
- China’s economic development over the past three decades means the country no longer needs massive Wall Street deals like Didi.
What they’re saying: “[M]ore and more listings will occur [on Chinese stock exchanges], both due to China pulling companies home, as well as the U.S. pushing them out,” Gabriela Santos, global market strategist at J.P. Morgan Asset Management, tells Axios.
Threat level: “Absent a political solution,” all Chinese companies listed in the U.S. could be delisted within three years, says Brendan Ahern, chief investment officer of Krane Funds Advisors.
By the numbers: There were 248 Chinese companies listed on the three largest U.S. exchanges as of May 2021, according to the U.S.-China Economic and Security Review Commission.
- The total market capitalization of these firms exceeded $2 trillion, or just under 10% of the NYSE’s 2020 equity market capitalization, according to the World Federation of Exchanges.
Be smart: Chinese companies are "stuck between a rock and a hard place," because Chinese law has prohibited them from undergoing audit reviews that will keep them listed — but the companies were allowed to list when it was known that they couldn't adhere to the reviews in the first place, Ahern notes.
- The SEC, Nasdaq and NYSE declined to comment.
- The Public Company Accounting Oversight Board oversees the audits and says on its site: “We remain concerned about our lack of access in China and will continue to pursue available options to support the interests of investors and the public.”
- On Sunday, the China Securities Regulatory Commission issued a statement addressing the audit issue saying there's been cooperation between U.S. and Chinese policy makers and that they've "worked together on pilot inspection programs."
What to watch: Shares of U.S. listed companies including Alibaba, JD.com and Baidu have all fallen this year amid this regulatory uncertainty and an economic slowdown in China.
- Yes, but: Despite this year’s headlines and volatility in Chinese assets, “our discussions with institutional clients around adding Chinese assets to portfolios have only increased,” says Santos.
The bottom line: Securities regulators in the U.S. and China want to draw new rules of engagement that only push them further apart.