The relationship between the U.S. and China has been deteriorating for several years as exemplified by the trade war and fallout from the coronavirus pandemic.

The stock market is the latest front where tensions between the two countries are playing out. The Senate recently passed the Holding Foreign Companies Accountable Act, which, if passed by the House and signed by President Trump, would require Chinese companies that fail to comply with the standards of the U.S. Public Company Accounting Oversight Board within three years to delist.

We would stress the following points concerning the potential for delisting:

  • There is a significant probability that the U.S. will eventually start to remove Chinese companies from U.S. listings if they do not comply with standards that are applied to other countries.
  • If a firm is delisted, U.S. institutional investors and U.S. residents who want to own shares in these companies can still buy them on other exchanges—most likely Hong Kong or Singapore. Similarly, foreign investors who have invested in Chinese companies via New York listings would be forced to buy them on international exchanges.
  • However, Chinese American Depository Receipts (ADRs) have outperformed their peers because they are seen as more stable and transparent and advanced, and the U.S. exchanges are flexible, efficient, and liquid.
  • Chinese firms that leave U.S. exchanges could experience volatility or revaluation as investors become concerned about the integrity of the firm’s financial statements.
  • There are about 230 Chinese companies—totaling about $1.8 trillion in market capitalization—listed on the Nasdaq and New York Stock Exchange.
  • Shifting from a U.S. to a Hong Kong listing is relatively straightforward and has already occurred. We anticipate more Chinese firms will follow.
This report is produced by the Janney Investment Strategy Group (ISG). It is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent. This report is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or financial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. For investment advice specific to your situation, or for additional information on this or other topics, please contact your Janney FA and/or your tax or legal advisor.

 

About the author

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/