Chinese companies facing retreat in the United States may seek asylum in Hong Kong

Chinese companies facing retreat in the United States may seek asylum in Hong Kong

NetEase has attributed its decision in part to the need for more funding, which it wants to use to expand its business. But it also became clear that he said the United States was becoming increasingly hostile to Chinese companies as regulators and lawmakers considered new rules that would lead to tighter controls. Some restrictions would even make it difficult for companies to publish publicly or continue trading in New York.

The entry into force of such rules “may lead to investor uncertainty for the issuers concerned, including us, the market price of our [US shares] it may be adversely affected and we may be deactivated if we are unable to “meet the requirements,” NetEase wrote in a listing on the Hong Kong Stock Exchange.

NetEase’s recognition is a sign of how much relations between the United States and China have deteriorated – and how much they are at risk for Chinese companies that are not developing a viable backup plan.

Other companies are also considering Hong Kong

“China’s technology giants see Hong Kong as a middle ground,” said Brock Silver, chief investment officer of Hong Kong-based Adamas Asset Management.

He added that the city was “under Chinese control, but still with access to US dollars.” Unlike mainland China, where there are strict restrictions on capital entering and leaving the country, Hong Kong allows capital to flow more openly. The city’s currency is also freely convertible.

NetEase is also not the last company to look at Hong Kong. About 37 Chinese companies are eligible to do so, according to data provider Refinitiv, based on their market cap, revenue and ability to comply.

At least a handful of companies that trade in New York seem to be already considering it. E-commerce company (JD) has received approval from the Hong Kong Stock Exchange for a secondary stock in Hong Kong and has released a prospectus, which was published on Friday. Bloomberg reported that the company may start trading as early as this month. Technical companies Baidu (BIDU) and (TCOM) may consider similar plans according to various Chinese media reports.

Baidu and declined to comment. But Baidu founder and chairman Robin recently suggested that his business could move to Hong Kong if necessary.

“We are really paying close attention to the US government’s tightening regulations on Chinese companies,” Li told the state-run China Daily last month“We are discussing internally what we can do to deal with it, including a secondary list in Hong Kong.”

Developing motives

New York has long been an attractive option for foreign companies to go public. Wall Street boasts the world’s largest stock exchanges and the opportunity to get involved huge amounts of investment capitalFor Chinese companies, the New York list also gave them the opportunity to avoid strict IPO rules in China, including a ban on companies with certain types of joint stock companies.

But Beijing has eased some of those restrictions in recent years as part of efforts to get Chinese companies to go home. The country is trying to improve its position as a major technological superpower, and the closer some of its most valuable companies are, the more influence the government can have on them.

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The desire to impress Beijing was widely quoted as a big reason for Alibaba’s decision to join Hong Kong last fall – although analysts also cited tensions between the US and China and the need to reduce political risks as a significant factor.

“The political reckoning that drives Chinese US technology companies to seek secondary listings was initially Beijing’s desire to put those companies under its bureaucratic control,” Silver said. “But it develops in the light of the trade war and its subsequent separation.”

It is not entirely clear how quickly potential new rules in the United States could cause problems for Chinese companies trading in New York. It envisages, for example, a bill that has not yet passed the US House of Representatives force these companies to open their books for U.S. regulators, a condition opposed to Beijing that requires companies that trade abroad to have their audit documents in mainland China, where they cannot be reviewed by foreign agencies.

But the bill would force these companies to be repealed only if they could not be audited for three consecutive years, according to analysts at Goldman Sachs.

However, even the potential for tighter regulatory scrutiny “could accelerate their trend towards double listing in the EU [Hong Kong] market, “Goldman analysts wrote in a recent report.

The pressure also comes from the Trump administration. Secretary of State Mike Pompeo praised the Nasdaq on Thursday for proposing new compliance rules that could affect Chinese companies, adding that other exchanges should consider similar provisions.

“American investors should not be exposed to hidden and unjustified risks associated with companies that do not follow the same rules as American companies,” Pompeo said in a statement“The action of the Nasdaq should serve as a model for other exchanges in the United States and around the world.”

And President Donald Trump has given authorities 60 days to recommend steps that regulators need to take to curb Chinese companies that do not comply with U.S. audit rules.

“It is wrong and dangerous for China to take advantage of our capital markets without taking into account the critical protections that investors in these markets rightly expect and deserve,” he wrote. in a memorandum published on thursday,,

The pros and cons of Hong Kong

A wave of secondary listings could bring great benefits to Hong Kong’s financial markets, where long-term stability has been threatened since last year. anti-government protests, further encroachment by Beijing and escalating tensions between the United States and China.
The United States may end its special relationship with Hong Kong. But for Western companies, this is complicated
For example, analysts at Jefferies recently suggested that the Asian financial hub is the benchmark. Hang Seng Index (HSI) eventually there will be a “complete transformation” as more Chinese internet companies list in Hong Kong, removing more city-oriented stocks such as banks and real estate companies. Such an “emigration enumeration” could add nearly $ 560 billion to Hong Kong’s market capitalization and raise $ 28 billion in capital.
In a recent study note, Jefferies analysts compared Dow Jones Industrial Average (INDU) to Hang Seng, saying that the New York index exceeded the Hong Kong index due to its desire to replace “stagnant” companies with “successful, high-growth” ones.

“We believe in [Hang Seng] over the next few years, it will undergo a similar change and become an index that mainly reflects the growth of new economic companies in China, “they wrote.

After all, Alibaba has been a major success story for the city. The company’s Hong Kong-listed shares have jumped 19% since they began trading last November.

“Other companies are following suit,” said Hong Hao, managing director and head of research at Bank of Communications International in Hong Kong. “It pays to have a plan B.”

Trade in Hong Kong is not without risk. The city has become a lightning bolt in the Washington-Beijing confrontation: Trump said last week that the United States wants to end its special economic and trade relations with Hong Kong, which could jeopardize the city’s status as a center for international business.

However, Trump’s statement does not include specific sanctions related to the financial sector in Hong Kong. And pegging the Hong Kong dollar to the US dollar seems safe for now: City officials have convinced investors this week that they have enough reserves to keep the bulb, which keeps the city’s currency trading close and stable.

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