Trump seeks new ways to crack down on Chinese stock listings in the U.S.

June 5, 2020, 7:01 AM UTC

The CEO of Hong Kong Exchanges and Clearing, which owns the Hong Kong stock exchange, believes more U.S.-listed Chinese companies will seek to re-list in China this year as tension between the two superpowers seeps into the stock markets.

“This is going to be a big year for IPOs, including both huge IPOs from China, but very substantial returnees, what we call them, from the United States,” Charles Li said during a conference hosted by investment bank Piper Sandler on Thursday.

Li’s comments came the same day President Donald Trump ordered his advisers to recommend executive action he could take against U.S.-listed Chinese firms, accusing China of posing a “significant risk for investors.”

But, according to Li, it’s a combination of increased scrutiny from the U.S. and the Hong Kong exchange’s recently relaxed restrictions that will drive Chinese companies to list closer to home.

Second home

“Today the atmosphere in the U.S. is becoming less friendly, and we obviously have fundamentally changed many aspects of our listing regime so that we are becoming more accommodating,” Li said, referring to a 2018 policy change that permitted companies to list dual-class shares.

Dual-class listings are preferred by tech companies. The structure allows executives to raise funds without diluting ownership of their company by issuing two share options that confer different levels of ownership.

In 2014, Alibaba chose to list in New York over Hong Kong because the latter wouldn’t accommodate dual-class shares. The e-commerce juggernaut’s massive $25 billion IPO that year was record-breaking—a win for New York and a major loss for the Hong Kong exchange. Since revising its rules, the Hong Kong exchange has lured a number of high-profile Chinese tech firms to list.

The first was smartphone maker Xiaomi, which launched a $4.72 billion IPO in June 2018, earning a $54 billion valuation. More important, Alibaba raised $11 billion through a secondary listing in Hong Kong. Li said the listing was “like a family member coming home.”

On Friday, Alibaba’s Nasdaq-listed rival revealed it is also planning a secondary listing in Hong Kong. The e-commerce platform filed a prospectus with the Hong Kong exchange. The document doesn’t offer any details about the sale, but Bloomberg reports aims to raise at least $2 billion as soon as next week.

Greater scrutiny

JD is not the only Nasdaq-listed company eyeing a secondary listing in Hong Kong. On Thursday, Chinese gaming firm NetEase secured a $3 billion secondary listing in Hong Kong, having listed on Nasdaq in 2000. Search engine giant Baidu, which listed on Nasdaq in 2005, is also said to be mulling options for a second flotation.

This split from Nasdaq comes weeks after the exchange proposed to increase its scrutiny of foreign IPOs. Following the scandal of Luckin Coffee—a Nasdaq-listed Chinese startup that was found to have committed major fraud and was forced to delist in May—Nasdaq proposed new rules for foreign-led IPOs. Under the new guidelines, foreign firms will need to raise a minimum $25 million—a rule that would have excluded 40 of the last 155 Chinese listings.

However, Nasdaq chief executive Adena Friedman said Thursday there is a “broader issue” of accounting and transparency at foreign firms, particularly in China, and called on the Securities and Exchange Commission (SEC) to do more to address the problem.

From the top

The SEC has fought for almost a decade to obtain better access to company audits in China, which Beijing often withholds as state secrets. Last month, however, the Senate passed a bill that could give the SEC greater leverage in demanding access to those documents.

Under the new legislation, if a company is unable to prove it is not controlled by a foreign government, or if the SEC is unable to review audits for a consecutive three years, the company will be banned from U.S. stock exchanges. Sen. John Kennedy (R–La.), who introduced the bill, said he did “not want to get into a new Cold War” but wants “China to play by the rules.” The bill has been passed to the House, where Speaker Nancy Pelosi (D-Calif.) said it will be reviewed.

Rhetoric from the White House, however, has struck a more divisive tone. On Thursday, Trump instructed his financial markets working group to submit within 60 days recommendations for executive action he could take to curb Chinese listing.

“While China reaps advantages from American markets…the Chinese government has consistently prevented Chinese companies and companies with significant operations in China from abiding by the investor protections that apply to all companies listing on United States stock exchanges,” Trump wrote.

Secretary of State Mike Pompeo added his own endorsement for greater scrutiny of Chinese firms, praising Nasdaq’s tighter restrictions as “a model for other exchanges in the United States and around the world.”

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