Commentary on Political Economy

Tuesday 1 October 2019


Nowhere to turn for funding as door slams shut on China Inc US regulators, exchanges and politicians turn up heat on Chinese companies LOUISE LUCAS

 Where is a Chinese company to turn for funding these days? Whether at home, across the border in Hong Kong or further afield in the US, doors are shutting faster than a unicorn can gallop. Politics is the latest obstacle, with the White House weighing a ban on Chinese companies listing in the US. Peter Navarro, White House trade adviser, may have dismissed the reports as “highly inaccurate” but he stopped short of specific rebuttals and American angst over China continues to manifest itself from trade to Silicon Valley to Wall Street, driven by the likes of Republican senator Marco Rubio. US exchanges and regulators are similarly antsy. Nasdaq, waking up to the low trading volumes and high volatility of smaller Chinese stocks, is seeking to impose stricter rules, according to Reuters. The Public Company Accounting Oversight Board has again sounded the alert on China’s refusal to allow it to inspect the audits of Chinese companies listed in the US.

 Not everyone is so leery. Hong Kong regulators have been far more willing to play ball. The stock exchange last year introduced dual-class shares, the absence of which cost it Alibaba’s record-breaking $25bn initial public offering in 2014. The only problem there is sentiment: markets are disturbed by the protesters’ clashes in the streets; the benchmark Hang Seng index is down 10 per cent since July 1. China itself is desperately wooing companies to “come home” or at least issue some form of stock that could be bought by domestic investors. But many of these efforts have turned out to be damp squibs. Chinese Depositary Receipts, a rather tortuous notion under which overseas-listed Chinese companies would have listed ADR-style securities in their home market, withered on the vine. Companies unsurprisingly balked at China’s unofficial cap on pricing. The latest wheeze, Shanghai’s Star Market, aimed at tech and science companies, eliminated regulatory pricing and rolled out in July to much fanfare. But just a couple of months later, issuers have slowed to a trickle. Any closing of public markets — or even talk thereof, which brings with it the risk of depressed valuations — hurts.

 As of February, 156 companies worth a total $1.2tn were listed on the biggest American exchanges, according to the US-China Economic and Security Review Commission, and plenty more are waiting in the wings. Hong Kong, too, hosts big hitters such as Tencent, the tech giant that, along with Alibaba, ranks in the world’s 10 most valuable companies. It is home to mobile phone maker Xiaomi, which listed in July 2018; among those readying plans to follow suit are facial recognition group Megvii and Alibaba, which is plotting a secondary listing in the territory. Further down the line are listings from Ant, Alibaba’s payments unit, and tech group ByteDance, valued at their last fund raisings at $150bn and $75bn respectively. The trouble for many of these companies is that private markets are febrile too. Even those with stronger pedigrees are having to fight for funds, offering sweeteners or pruned valuations. Those already listed can afford to be a little more sanguine. Even if Washington takes the nuclear option of delisting them, their structures — essentially, a unit containing the key means of production like licences based in China and registration in Cayman Islands or British Virgin Islands — afford some leverage. “Should things get really bad, there is nothing to stop Beijing from telling US investors: ‘You keep the BVI shell, we’ll keep the domestic Chinese assets’, notes Louis Gave of Gavekal Research. “In short, the risk is that by seeking to make life difficult for Chinese companies listed in the US, Washington could end up cutting off its nose to spite its face.”

 Yet beyond the politicians and regulators, there is another important constituency vexing Chinese issuers — investors themselves. Shareholders were burnt in last year’s run of China IPOs, nearly all of which ended the year below their issue price. Class action lawsuits have surfaced against the likes of Tencent Music Entertainment and ecommerce group Pinduoduo. The doors may be closing. US shareholders are not dashing to prop them open.

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