US-China trade relations continue to plumb new depths with blacklists, bans and crackdowns coming from both directions – and that is panicking investors who are scrambling to find ways to protect their cash.
Fund managers are planning or accelerating a shift out of Chinese American Depository Receipts (ADRs) into their Hong Kong-listed counterparts, or are buying more shares listed on the mainland.
Some activist investors are going as far as pressing US-listed Chinese companies not yet listed in Hong Kong to do so as soon as possible.
Meanwhile, retail US investors with no access to Hong Kong’s markets have begun dumping Chinese ADRs after the US Securities Exchange Commission (SEC) this month finalised rules to kick non-compliant Chinese companies off American exchanges in three years.
“It looks like we’re going down the track where these companies will be delisted from the United States,” said Thomas Masi, New York-based partner and equity portfolio manager at GW&K.
Washington is demanding complete access to the books of US-listed Chinese companies, but Beijing bars foreign inspection of working papers from local accounting firms – an auditing dispute that puts hundreds of billions of dollars of US investments at stake.
Goldman Sachs estimates a quarter of the $1 trillion market value of China ADRs is with American investors.
The rules are forcing a rethink. GW&K’s Masi said the asset manager is reviewing its retail-focused ADR strategy “to see if they do have long term viability.”
Individual US investors flocked out of Didi Global after the Chinese ride-hailing company unveiled plans on December 3 to withdraw from the New York Stock Exchange and pursue a Hong Kong listing.
The uncertainty has also caused a near halving of the market capitalisation of Chinese ADRs over the year, to about $828 billion, Refinitiv Eikon data showed.
Fund’s Alibaba Strategy
The strategy for GW&K’s emerging market fund, which owns shares in Chinese companies including Alibaba and Trip.com Group, is to swap out of ADRs into their Hong Kong-traded shares, but only when liquidity in the latter improves, Masi said.
Brendan Ahern, chief investment officer of KraneShares, said he is also ready to make the shift when the time is ripe.
“We’ve got our finger on the trigger to make that migration,” Ahern told investors in a webinar, held after the SEC rules and the Didi delisting announcement sent Chinese tech shares tumbling. “We’re not going to stand idle and watch these companies go away.”
The New York-based, China-focused asset manager, which runs a $7.5 billion exchange-traded fund (ETF) tracking China internet stocks including US-traded JD.com, has tested conversions into Hong Kong listings and found them operationally simple.
“You simply tell your custodian, you want to make that conversion. The ADR custodian bank charges like 4 cents a share to make that conversion… overnight, your US names become the Hong Kong share class.”
According to accounting firm EY, five of the top 10 Hong Kong listings in 2021 were secondary listings of US-listed Chinese companies including Baidu and Bilibili Inc.
Hong Kong Listings Move
“US-listed companies coming home is the big trend,” said Lawrence Lau, EY Greater China Financial Accounting Advisory Services leader. “If one day, their shares cannot change hands in the US, Hong Kong can serve as a safety net platform where their shares can still trade normally.”
A lot of companies have already done that, making life easier for investors.
Aaron Costello, Beijing-based regional head for Asia at investment consulting firm Cambridge Associates, notes that 12 of the 15 largest US-listed Chinese companies already have a secondary Hong Kong listing and these companies comprise roughly 85% of the market value of China ADRs in the MSCI China index.
Nuno Fernandes, partner and portfolio manager at GW&K, said he is pressing companies which are lagging.
“We’re having active conversations with the management of those companies, and we are sending them a clear message – it’s your obligation to pursue all the opportunities to dual-list in Hong Kong as soon as possible,” he said.
Some investors are going directly to China’s increasingly deregulated domestic market.
US IPOs Drop
Catherine Hickey, vice-president at consultancy Segal Marco Advisors, said most of the emerging market managers it uses now tend to invest directly into Chinese companies through the A-share market, which is increasingly open and liquid.
Morgan Stanley also recommends exposure to China-listed A-shares, while expressing caution towards the MSCI China index, which has roughly one-fourth of its weightings in ADRs.
“In the next three years, we’re going to see very few IPOs of Chinese companies in the US, if any,” said GW&K’s Fernandes.
“So by definition, the focus is going to be more on the mainland Chinese market, because that’s where the IPOs are going to come from.”
- Reuters with additional editing by Sean O’Meara