The risk of excluding them from the Stock Market is that the wealth is transferred to the founders and the funds that support them
Markets are often schizophrenic, and Chinese stocks listed in the United States are one example. Many of them have been affected since Washington regulators detailed on Wednesday how they would force foreign companies out of the stock market unless they could pass audit inspections, among other requirements. However, recent Chinese issues in New York suggest that a warm welcome awaits those still planning to go public. The risk is that if companies start to leave the city that never sleeps, minority investors will suffer the most.
As part of the rules published by the SEC on the 24th, companies can be expelled from the American Stock Exchanges if the American inspectors cannot examine their audits for three consecutive years. China has consistently blocked foreigners’ access to documents, citing the need to protect state secrets. The new law triggered a brutal sale of shares. Search engine Baidu, one of the worst hit, lost $ 20 billion in market value in two days.
However, companies from the People’s Republic keep coming. Listing in the United States is attractive for many reasons, including raising funds abroad that would otherwise be made difficult by capital controls, and helping to build a brand for those with global ambitions.
Trucking giant Didi Chuxing is leaning toward Manhattan for an IPO that could be valued at $ 100 billion. Recent success stories are increasing the appeal: Real estate agency Ke has nearly doubled in value since its debut in August. In total, Chinese groups have raised $ 19 billion through public offerings in New York in the past two years, according to Refinitiv data.
The latest wave of sales could induce Chinese managers to leave earlier to seek higher valuations near their country. Direct offers worth $ 24 billion were announced last year, according to Dealogic.
If this trend is any guide, minority shareholders will be the hardest hit. Entrenched founders such as Charles Chao of internet company Sina have made offers to buy well below net asset value, leaving dissatisfied investors with a long and uncertain battle in foreign courts to get more.
A delisting process runs the risk of transferring wealth from US shareholders to the Chinese founders and the venture capital firms that back them. Trina Solar, taken off the floor in 2016 for $ 1.1 billion, is now worth five times more in Shanghai. The reaction of the US market this week suggests that investors believe that nothing good can come of Washington’s move. They have good reason to think so.