Bankers are pitching “homecoming” offerings to dozens of Chinese companies listed on Wall Street, as tensions between Beijing and Washington threaten the future of shares worth an estimated $1tn.
Several big companies have already launched offerings in Hong Kong, as the Trump administration increases pressure on Chinese businesses trading on US markets. The latest was JD.com, the ecommerce group that this week completed a successful secondary share sale. The sale ranked as the world’s second biggest offering of the year, at nearly $4bn.
The moves come after the US Senate passed a bill last month that could force Chinese companies to withdraw from American exchanges if they do not comply with US accounting standards. Bankers and lawyers say that plenty more US-listed Chinese companies could follow JD.com, meaning that Hong Kong — widely viewed as a victim of frictions between the Washington and Beijing — could profit handsomely.
Until recently, the Asian finance hub had “lacked a large pool of higher quality” Chinese technology companies, said Johnson Chui, head of equity capital markets for Asia Pacific at Credit Suisse. But the positive receptions for secondary listings, including those of NetEase, the gaming group, and tech company Alibaba, “show there is positive pent up investor demand and desire for more of these companies to be listed in Hong Kong”.
US-listed Chinese companies have raised almost $20bn through secondary listings in Hong Kong since November, including a nearly $13bn bonanza for Alibaba.
That is despite a sharp economic recession in the city and violent clashes between police and anti-government protesters last year that repeatedly brought Hong Kong’s central business district to a standstill. US President Donald Trump also said last month he would strip Hong Kong of its special trading status in response to Beijing’s plans to impose a sweeping security law on the territory.
“We’re still working against the backdrop of a global pandemic and more volatility in the market than we’d like, but the pipeline for Hong Kong looks good,” said Jason Elder, a partner at law firm Mayer Brown in the city.
Bankers said that a Hong Kong float was not a priority for most companies until Luckin Coffee’s stock price implosion turned a spotlight back on the risks faced by investors in US-listed Chinese companies. An internal investigation at the company revealed it had fabricated hundreds of millions of dollars of sales last year.
The new US legislation, which also needs to be passed by the House of Representatives, calls for companies to be barred from listing securities in if they have not complied with the US accounting board’s audits for three consecutive years.
Regulators in China bar auditors in the country, including affiliates of the Big Four accounting firms, from sharing the work they do for corporate clients with foreign regulators. That has created tension with the Public Company Accounting Oversight Board and Securities and Exchange Commission in the US.
“The SEC has been flagging [this] as an issue for 10 years,” said Justin Cooke, a New York-based partner at law firm Allen & Overy. “US investors lost a significant amount of money as a result of that,” he added, referring to the Luckin Coffee debacle.
Li He, a Hong Kong-based partner at Davis Polk, the law firm, said there was a “sense of urgency” among Chinese companies to list in Hong Kong because the legislation in the US was “making business anxious”. Mr He said it made sense for many companies to consider the city as an option to hedge against the risks.
Bruce Pang, head of macro and strategy research at investment bank China Renaissance, said that if the Senate bill were passed by the House without significant changes, Chinese companies could be forced off Wall Street in as little as three years. He estimated about 90 per cent of the 276 Chinese businesses listed in the US were vulnerable to the proposed law.
But Mr Pang said vague language used in the bill and a requirement for three consecutive years of non-compliance before companies can be delisted “really gives some flexibility” to regulators in terms of enforcement.
“Even US investors do not want to lose the chance to share in the growth from China’s new economy stocks,” he added.
Any Chinese companies that switch their primary listing from the US to Hong Kong would also face more stringent local regulations on corporate reporting and governance compared to those that only have a secondary share presence in the city.
“There’s a tonne more shareholder protection you can get in Hong Kong because it’s set up to deal with just these kinds of companies,” said David Smith, head of corporate governance for Asian equities at Aberdeen Standard Investments.
That stood in contrast, he said, to the disclosure exemptions granted to many of the Chinese groups listed on Wall Street via offshore holding entities.
Even as boards consider other listing venues, the US legislation has not stopped some Chinese companies from looking to sell shares in America. BlueCity, a Chinese social media site for the LGBT+ community, this week filed paperwork with the SEC for a listing on the Nasdaq.
“You can’t say that all these companies have to go back to Hong Kong or China,” said Mr Pang. “If they think they can enjoy higher valuation levels or broader investment in the US, they may chose the US.”
Additional reporting by Ryan McMorrow in Beijing