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.