Stay, Swap or Delist: Investors prepare for the delisting of US-listed Chinese stocks

Signage is seen at the headquarters of the United States Securities and Exchange Commission (SEC) in Washington, DC, US
Signage is seen at the United States Securities and Exchange Commission (SEC) headquarters in Washington, DC, U.S., May 12, 2021. Photo taken May 12, 2021. REUTERS / Andrew Kelly

December 19, 2021

By Samuel Shen and Selena Li

SHANGHAI/HONG KONG (Reuters) – As prolonged Sino-U.S. diplomatic tensions threaten to force Chinese companies out of U.S. stock exchanges, global equity investors are evaluating ways to maintain maintain or increase exposure to the world’s second-largest economy.

Fund managers are planning or accelerating the move from Chinese-American Depository Receipts (ADRs) to Hong Kong-listed partners or buying more mainland-listed shares. Some activist investors have gone as far as to press Chinese companies listed in the United States that have not yet listed in Hong Kong to do so as soon as possible.

Meanwhile, US retail investors without access to the Hong Kong market have started dumping China’s ADRs after the US Securities Exchange Commission https://www.reuters. com/business/us-sec-mandates-foreign-companies-spell-out-ownership-structure-disclosure-2021-12-02 (SEC) this month finalized rules to weed out companies that do not Chinese compliance from US exchanges for three years.

“It looks like we are going down a path where these companies are going to be delisted from the US,” said Thomas Masi, partner and equity portfolio manager at New York-based GW&K , citing lingering tensions https://www.reuters. com/world/china/us-Build-new-software-tool-predict-action-that-can-draw-chinas-ire-2021-12-15 between the world’s two largest economies.

Washington is demanding complete access to the books of Chinese companies listed in the US, but Beijing bans foreign inspections of the working papers of local accounting firms – an audit dispute. It puts hundreds of billions of dollars of US investment at risk.

Goldman Sachs estimates a quarter of the $1 trillion market value of Chinese ADRs is held by US investors.

The rules are forcing a rethink. GW&K’s Masi said the asset manager is looking at its retail-focused ADR strategy “to see if they’re viable in the long-term.”

US individual investors flocked to by Didi Global following as the Chinese ride-hailing company revealed plans on December 3 to withdraw from the New York Stock Exchange and pursue a listing in Hong Kong.


Refinitiv Eikon data shows that uncertainty has also caused the market capitalization of China ADRs to nearly halve for the year, to around $828 billion.

The strategy for GW&K’s emerging markets fund, which owns shares in Chinese companies including Alibaba and Group, is to swap ADRs into their Hong Kong-traded shares, Masi said. but only if the liquidity of this fund improves.

Brendan Ahern, Chief Investment Officer of KraneShares, said he is also open to making a change when the time is right.

Ahern told investors during a webinar, held after SEC regulations and Didi’s delisting announcement sent Chinese tech stocks plunging. “We’re not going to stand by and watch these companies disappear.”

New York-headquartered China-focused asset manager that runs a $7.5 billion exchange-traded fund (ETF) that tracks Chinese Internet stocks including JD .com is US-traded, tested the conversions to the listings in Hong Kong and found them to be straightforward.

“You just have to tell your guardian you want to make that switch. The ADR custodian bank charges like 4 cents a share to make that conversion… overnight, your US name becomes Hong Kong stock.”


According to accounting firm EY, five of the top 10 Hong Kong listings in 2021 are secondary listings of Chinese companies listed in the US including Baidu and Bilibili Inc.

“It is a big trend for US-listed companies to return home,” said Lawrence Lau, head of China Financial Accounting Consulting Services at EY Greater China. “If one day their shares cannot change hands in the US, then Hong Kong can serve as a safety net platform where their shares can still trade normally.”

Lots of companies already do that, making investors’ lives easier.

Aaron Costello, Beijing-based head of Asia at investment advisory firm Cambridge Associates, noted that 12 of the 15 largest Chinese companies listed in the US already have secondary listings. in Hong Kong and these companies account for about 85% of the market value of ADR China. in the MSCI China Index.

Nuno Fernandes, partner and portfolio manager at GW&K, says he’s pressing on companies that are lagging.

“We are having active conversations with the management of those companies, and we are sending them a clear message: it is your duty to pursue all opportunities to be dual-listed. in Hong Kong as soon as possible,” he said.

Many companies have already done so, so those that don’t “better have a very good explanation why they aren’t dual-listed yet. And how do they plan to tackle it?”

Philip Li, chief investment officer at Wellington Management Co, agrees: “The worst case scenario is that ADR will be delisted and have nowhere else to go.”


Some investors are heading directly into China’s increasingly deregulated domestic market.

Catherine Hickey, vice president of consulting firm Segal Marco Advisors, said that most of the emerging market managers they use now tend to invest directly in Chinese companies through the A-market. share, the market is increasingly open and highly liquid.

So if there’s less ADR then “it doesn’t make much of a difference.”

Morgan Stanley also recommends exposure to China-listed Grade A stocks, while expressing caution for the MSCI China index, which has about a quarter of its weight in the ADR.

“Over the next three years, we will see very few IPOs of Chinese companies in the US,” said Fernandes of GW&K.

“So by definition, the focus will be more on the mainland China market, because that’s where IPOs come from.”

(Additional reporting by Ross Kerber in Boston; Editing by Vidya Ranganathan and Ana Nicolaci da Costa) Stay, Swap or Delist: Investors prepare for the delisting of US-listed Chinese stocks

Bobby Allyn

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