6 November 2019
The US-China trade war narrative continues. In the latest chapter, the Trump administration has suggested the possibility of delisting Chinese companies from US stock exchanges. GAM Investments’ Jian Shi Cortesi examines the reality of this proposal.
Another battle is being fought in the US-China trade war. Sources from the Trump administration have implied that the delisting of Chinese stocks could be a potential weapon in the ongoing feud between nations. So far, they have provided limited details on how this would be enforced and how strict the new rules might be. Indeed, is President Trump simply deflecting from the Ukraine scandal?
Without any answers, investors initially panicked and US-listed Chinese companies saw their share prices fall sharply. US Treasury spokesperson Monica Crawley responded to the chaos with a statement that attempted to quell the rumours: “The administration is not contemplating blocking Chinese companies from listing shares on US stock exchanges at this time.” The vague wording of this denial, however, has sparked further concern; including “at this time” could suggest that delisting remains a viable option, rather than an outright impossibility. Consequently, investors remain cautious about the future of China in the US. A claim of “fake news” from White House Trade Advisor Peter Navarro did help Chinese stocks rebound somewhat, but general opinion remains conflicted.
We feel there is a very small probability of the US delisting Chinese companies. Such an action would likely result in massive market pushback from institutional investors, investment banks and exchanges. Preventing investors from investing in Chinese companies could expose them to unintended tracking error and underperformance risks, considering many of these companies are important constituents of major indices.
Furthermore, we believe the delisting would severely damage the US’s credibility as an open financial market and dampen the credibility of American Depositary Receipts (ADRs). It would also hurt the competitiveness of US exchanges versus other global exchanges – in the case of Alibaba, for example, both the US and Hong Kong exchanges competed for its initial public offering (IPO). Additionally, such a large-scale delisting would be unprecedented. Even Russian companies are still traded on US exchanges, despite the existing American sanctions against Russia.
In the unlikely event of a delisting, China would be faced with two options: voluntary or involuntary. A form of voluntary delisting has already been seen on an extremely small scale, as several Chinese firms have chosen to exit the US market. In these instances, some firms offered buyout prices of 20% - 50% above market price in order to entice investors to approve of the delisting; however, we would not expect such a premium to be offered if the delisting is catalysed by the US government. Any firms which delist could possibly relist in Hong Kong, in Shanghai or on other exchanges.
What investors fear is an involuntary delisting, which might result in panic-selling among investors. In our view, this could create a once-in-a-lifetime opportunity to obtain these shares at bargain prices, bearing in mind that delisting only has a short-term impact on share prices. Afterwards, as long as the shares were not listed, there would be limited liquidity for shareholders, but in the long-term, the delisted firms would likely relist on non-US exchanges. However, we believe we will not see the above scenario occur, as the U.S. government will most likely give these companies a few years to delist to avoid market impact in the case of involuntary delisting.
We do not believe the Chinese government would suffer any negative effects from any delistings in the long-run. It is our view that they would prefer for large Chinese firms to be listed on their domestic stock exchanges, and to facilitate this, they may introduce favourable policies to help the impacted firms list more quickly. Currently, Alibaba is planning a listing in Hong Kong; other firms may follow suit, given the threat of involuntary delisting on the table. These firms would face few obstacles in raising new capital from other exchanges. Realistically, they would receive much higher valuations if they were listed on domestic Chinese exchanges.
In summary, we believe that in the unlikely event of the US delisting Chinese stocks, there would be little negative impact on Chinese firms in the mid-to-long-term. The brunt of the impact would be felt by US-based investors and the US capital market. Meanwhile, we believe the Chinese government would use this as an opportunity to welcome back some of China’s best companies to the domestic capital market.