NetEase attributed its decision in part to a need for more funding, which it wants to use to expand its business. But it also made clear that it thinks the United States is becoming more hostile for Chinese companies, as regulators and lawmakers consider new rules that would lead to harsher scrutiny. Some restrictions could even make it tougher for companies to go public or keep trading in New York.

The enactment of such rules “could cause investor uncertainty for affected issuers, including us, the market price of our [US shares] could be adversely affected, and we could be de-listed if we are unable to” meet requirements, NetEase wrote in filings to the Hong Kong Stock Exchange.

NetEase’s acknowledgment is a sign of how much the relationship between the United States and China has deteriorated — and how much is at risk for Chinese companies that don’t develop a viable backup plan.

Other companies are considering Hong Kong, too

“China’s tech giants see Hong Kong as middle ground,” said Brock Silvers, chief investment officer for Hong Kong-based Adamas Asset Management.

He added that the city is “under Chinese control, but still with US dollar access.” Unlike mainland China, where there are strict curbs on capital that comes into and out of the country, Hong Kong allows capital to flow more openly. The city’s currency is also freely convertible.

NetEase won’t be the last company to look to Hong Kong, either. Some 37 Chinese companies meet requirements to do so, according to data provider Refinitiv, based on their market cap, amount of revenue and ability to comply with regulations.

At least a handful of companies that trade in New York already appear to be considering it. E-commerce company JD.com (JD) has received approval from the Hong Kong Stock Exchange for a secondary listing in Hong Kong, and filed a prospectus that was made public Friday. Bloomberg has reported that the company could start trading as early as this month. Tech firms Baidu (BIDU) and Trip.com (TCOM) may be considering similar plans, according to various Chinese media reports.

Baidu and Trip.com declined to comment. But Baidu founder and chairman Robin Li recently suggested that his business could turn to Hong Kong if it needed to.

“We are indeed paying close attention to the US government’s tightening regulations on Chinese firms,” Li told the state-owned newspaper China Daily last month. “We are discussing internally what we can do to cope with it, including a secondary listing in Hong Kong.”

Evolving motivations

New York has long been an alluring option for foreign businesses to go public. Wall Street boasts the biggest stock exchanges in the world and the ability to tap into massive amounts of investment capital. For Chinese companies, a New York listing also afforded them the ability to avoid strict IPO rules in China, including a prohibition on firms with certain types of shareholding structures.

But Beijing has been loosening some of those restrictions in recent years as part of a push to get Chinese companies to come home. The country is trying to improve its standing as a major tech superpower, and the closer some of its most prized companies are, the more influence over them the government can have.

Alibaba's homecoming is about pleasing China and buying trade war insurance
The desire to impress Beijing was widely cited as a big reason for Alibaba’s decision to list in Hong Kong last fall — though analysts also pointed to US-China tensions and the need to mitigate political risks as a substantial factor, too.

“The political calculus driving China’s US-listed tech firms to seek secondary listings was originally Beijing’s desire to bring those companies under its bureaucratic control,” Silvers said. “But it has evolved in light of the trade war and subsequent de-coupling.”

It’s not entirely clear how quickly potential new US rules could lead to trouble for Chinese companies that trade in New York. One bill that still hasn’t passed the US House of Representatives, for example, is meant to compel those firms to open their books to American regulators — a condition resisted by Beijing, which requires companies that are traded overseas to hold their audit papers in mainland China where they cannot be examined by foreign agencies.

But that bill would only force those businesses to de-list if they could not be audited for three consecutive years, according to analysts at Goldman Sachs.

Even the potential for tighter regulatory scrutiny, though, “is likely to accelerate their dual-listing trend into the [Hong Kong] market,” the Goldman analysts wrote in a recent report.

Pressure is also coming from the Trump administration. Secretary of State Mike Pompeo on Thursday praised the Nasdaq for proposing new rules on compliance that could affect Chinese companies, adding that other exchanges should consider similar regulations.

“American investors should not be subjected to hidden and undue risks associated with companies that do not abide by the same rules as US firms,” Pompeo said in a statement. “Nasdaq’s action should serve as a model for other exchanges in the United States, and around the world.”

And President Donald Trump gave authorities 60 days to recommend steps regulators should take to clamp down on Chinese companies that don’t comply with US audit rules.

“It is both wrong and dangerous for China to benefit from our capital markets without complying with critical protections that investors in those markets rightfully expect and deserve,” he wrote in a memo published Thursday.

Pros and cons in Hong Kong

A wave of secondary listings could greatly benefit Hong Kong’s financial markets, where longstanding stability has been threatened by last year’s anti-government protests, further encroachment by Beijing and the escalating tensions between the United States and China.
The US could end its special relationship with Hong Kong. But for western companies, it's complicated
Analysts at Jefferies, for example, recently suggested that the Asian financial hub’s benchmark Hang Seng Index (HSI) will eventually have a “complete makeover” as more Chinese internet companies list in Hong Kong, edging out more city-centric stocks, such as banks and property firms. Such a “listing emigration” could add nearly $560 billion to Hong Kong’s market capitalization and raise $28 billion in capital.
In a recent research note, the Jefferies analysts compared the Dow Jones Industrial Average (INDU) to the Hang Seng, saying the New York index has outperformed the Hong Kong benchmark because of its willingness to replace “stagnant” companeis with “successful, high-growth” ones.

“We believe the [Hang Seng] will undergo a similar change over the next few years, and will become an index that reflects mainly the growth of new economy companies in China,” they wrote.

Alibaba, after all, has been a major success story for the city. The company’s Hong Kong-listed shares have jumped 19% since they started trading last November.

“Other firms are following suit,” said Hong Hao, managing director and head of research for Bank of Communications International in Hong Kong. “It pays to have a Plan B.”

Trading in Hong Kong isn’t without risk. The city has become a flashpoint in the confrontation between Washington and Beijing: Trump said last week that the United States wants to end its special economic and trading relationship with Hong Kong, which could imperil the city’s status as a center for international business.

Trump’s announcement, though, did not include any specific sanctions related to Hong Kong’s financial sector. And the Hong Kong dollar’s peg to the US dollar appears to be safe for now: City authorities reassured investors this week that they have enough reserves to maintain the peg, which keeps the city’s currency trading within a narrow, stable band.

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