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Trump delisting threat benefiting Hong Kong

(ATF) Donald Trump’s threat to delist US-listed Chinese companies is turning out to be a boon for Hong Kong as the financial centre experiences a surge in foreign investment flows chasing new IPOs.

More than 150 China-based companies with a combined market value of $1.2 trillion are traded on US stock exchanges and many are already seeking alternatives.

Alibaba Group Holding, game developer NetEase and online retailer JD.com all listed on the Hong Kong Stock Exchange after raising a total $20 billion through stock offerings.

“This is a game changer as mega IPOs will start considering HK first and this will see investors and funds flowing into the territory,” said Nitin Dialdas, Chief Investment Officer of Mandarin Capital Limited. 

“It is possible that companies like Baidu, Alibaba and Netease would consider making HK their primary listings and we will also see Bytedance choose HK over US for its listing, were the PCAOB rule change to go through.”

These companies are now being followed by Ant Group , formerly called Ant Financial, affiliated to China’s e-commerce giant Alibaba. It has planned a concurrent listing on Shanghai Stock Exchange’s STAR market and The Stock Exchange of Hong Kong.

Benchmarks and investor portfolios will certainly impacted in the coming months.

“There will be a larger weightage for technology, consumer discretionary, and healthcare – investors will have to pay a lot more attention to these sectors as we think this is an irreversible process,” said Manishi Raychaudhuri BNP Paribas Head of Equity Research – Asia Pacific.

“Markets in Hong Kong and China are clear gainers from what is happening,” he said while adding structure of the HK and China markets are changing significantly as a result of these listings.

World’s most valuable exhange

Ahead of these and other changes, Hong Kong Exchanges became the world’s largest exchange operator by market capitalization when its shares struck an all-time high this week. 

Starting in August Hong Kong’s Hang Seng benchmarks will start including WVRs (Weighted Voting Rights) and secondary-listed companies from the Greater China region.

“The upcoming HSI and HSCEI rebalancing will also see further changes with Alibaba and Meituan likely to go into HSI. These two companies and Xiaomi are likely to be included in the HSCEI,” said Sean Darby 

“The bottom line is that the evolution of the Hang Seng Index over the next 18 months will largely shift the index to a pure China one with a significant tech, e-commerce and IT weighting. In this sense, the index will seem a little like the FTSE 100 which is traded in London but is host to a large number of overseas companies.”

US investors, regulators

Listed companies in the US are legally required to be audited by firms that are inspected by US audit watchdog Public Company Accounting Oversight Board (PCAOB) – Chinese companies have pushed back on this requirement for years.

In May, the US Senate passed a legislation that issuer’s securities be banned from trade on a national exchange or through other methods, if the board is unable to inspect the issuer’s public accounting firm for three consecutive years. 

US authorities cite scandal-plagued Luckin, a Chinese coffee chain, one of those overseas companies whose auditor is beyond the reach of the PCAOB. The company disclosed earlier this year that some of its employees had fabricated sales accounts.

US President Donald Trump has set an August deadline for US financial regulators to recommend ways to crack down on Chinese companies listed in America that fail to abide by proper accounting standards. 

“It is both wrong and dangerous for China to benefit from our capital markets without complying with critical protections that investors in those markets rightfully expect and deserve,” Trump said in a statement.

“Preventing the PCAOB from complying with its statutory mandate means that investors cannot have confidence in the financial reports of audited companies and creates significant risks to investors in the securities listed on United States stock exchanges.”

A President’s Working Group has been set up to go into the matter and submit by August recommendations to “protect investors in United States financial markets from the failure of the Chinese government to allow PCAOB-registered audit firms to comply with United States securities laws and investor protections.”

Vanguard Group, the New York Stock Exchange and Nasdaq have all pushed back on these US threats to delist Chinese companies, according to a Bloomberg report.

“Companies is likely to move their listings,” said Rodney Comegys, a principal at Vanguard. “They’ll move their place from New York to Hong Kong.”

And that may happen sooner than later.

Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai

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