Luckin Coffee Delisted and Investing In Chinese Companies | Investing Rx. Ep 12
Investors move Chinese assets from Wall Street to Hong Kong
Global fund managers are cutting their stakes in US-based Chinese companies such as Alibaba, Netease and JD.com. Risks are growing, investors will be forced to leave US exchanges, instead switching to shares of companies listed in Hong Kong.
Delisting risks emerged last September when the US presidential administration Donald Trump explored measures to kick Chinese companies off Wall Street if they fail to comply with US accounting standards, part of the escalating standoff between the world’s two leading economies.
Now this threat has become a reality. The Law on Holding Foreign Companies to Account has been passed by both houses of the US Congress and is due to be signed by Trump soon. Foreign issuers in the United States that opt out of their audits within three years may be delisted following the law..
Since most Chinese companies are prohibited from disclosing information deemed to be state secrets by mainland Chinese law, they are often unable to pass such checks, making them vulnerable to delisting..
«This is always what you understand as a potential risk. Now this risk really becomes a reality», – considers Brian Bundsma, Portfolio Manager at Vontobel Asset Management from New York.
Bandsma said he has begun shifting positions in American depositary receipts (ADRs) of Chinese companies towards Hong Kong. According to him, there are two ways, and he chooses the slower, but less costly route. But «if we see that the risk becomes more immediate, we can convert everything very quickly», – he said.
Nicholas Yeoh, head of Chinese equities at Aberdeen Standard Investments, said his fund is making adjustments too.
«Placement doesn’t matter. For reasons of caution, we just buy the same companies in the Hong Kong market. The transition is pretty simple», – he explained.
An increasing number of Chinese companies are secondary listed in Hong Kong, giving investors an alternative.
US registered companies including Alibaba, JD.com, NetEase, Yum China and New Oriental have already listed their shares in Hong Kong.
More than 20 other ADRs, including Pinduoduo, Vipshop, and Bilibili, are also eligible for secondary listing in Hong Kong, according to Morgan Stanley..
Brendan Ahern, Chief Investment Officer of New York-based Krane Funds Advisors believes that most of the conversions so far have been by Asian and European investors looking to join their investment base.
Temasek, a Singapore government-owned investment firm, said in September that it had transferred half of its stake in Alibaba, worth about $ 3 billion, from the United States to Hong Kong..
Matthews Asia revealed to investors in July that it owns Chinese firms like Alibaba through listings in both the US and Hong Kong..
There is also the option for US investors to trade Chinese firms like Tencent in the less liquid over-the-counter (OTC) market.
Ahern believes China and the United States will eventually come up with a plan to avoid wholesale delisting, which could affect more than $ 2 trillion in U.S. investments in U.S.-registered Chinese companies..
«(We) will not be idle as we have a fiduciary obligation to protect our investors», – Ahern said, adding that the firm had conducted a test conversion of US Alibaba shares into Hong Kong shares, proving that the process «extremely simple».
Fund managers say that US and Hong Kong-listed stocks are completely fungible, with little difference in price or value..
However, in the worst-case scenario, a massive exodus of Chinese companies would affect investors and reduce the competitiveness of US capital markets, a lawyer working with ADR said on condition of anonymity..
«Removing well-known successful companies from the US exchanges will make London or Hong Kong or both stronger and make it feel like there may be a better choice now than the US exchanges.», – he thinks.