Chinese firms are delisting from American exchanges at an increasing pace. It is a complete reversal of a trajectory that up until recently saw China-based firms flocking to list their shares in the United States, Hong Kong, and elsewhere, both to raise their global profiles and to enlarge their sources of funding.
The new delisting trend, according to estimates prepared by the American Enterprise Institute, has already reduced the market capitalization of Chinese listings in America by 50 percent. Similar movement has taken hold in other Western stock markets and even in Hong Kong.
The presence of Chinese firms on these exchanges seems set to shrink much farther. It may even go to zero. Practically speaking, the trend may have little effect on financing, because direct American investment in China has risen rapidly enough to provide a substitute, at least until now.
The dramatic shift by Chinese firms has its roots in data. The U.S. Securities and Exchange Commission (SEC) has demanded more disclosure—more data—than in the past, while the authorities in Beijing have become increasingly secretive about giving data to anyone, much less the American authorities on Chinese business or Chinese life. Companies caught between such impossible demands have asked for concessions from both the American and Chinese authorities and, receiving none from either, have had little choice but to delist.
From the American side, it is less a change in demands than a decision to enforce existing rules. What has changed is the zeal for enforcement at the SEC. For years, the authorities in Washington demanded full disclosure from listed Chinese companies, as it does from all listed firms, American and foreign. But when the Chinese firms showed a reluctance, the authorities took little action.
In response to the inevitable frictions, the Obama White House negotiated what it referred to as a “settlement.” It consisted of the SEC looking the other way. The Trump White House took a harder line. It gave the Chinese three years to fix the problem or be forcibly delisted.
In January this year, President Joe Biden’s SEC decided to enforce the Trump administration’s position. Given Biden’s vitriol against former President Donald Trump, there is considerable irony in this, but that sort of thing aside, the SEC is moving. Under what is called the Holding Foreign Companies Accountable Act, the SEC now claims the unilateral power to forcibly delist any company that the Public Company Accounting Board says it cannot audit fully.
As Washington has gotten tougher about demanding information, Beijing has become increasingly concerned about what it calls “data loss.” Chinese authorities have always shown a reluctance to share information with anyone, especially foreign regulators. Beijing has always been happy to receive data from foreign investors entering the country but resisted any return outflow, even to the headquarters of the foreign investors and much less to a foreign government.
Such attitudes have hardened in the last couple of years under Chinese leader Xi Jinping. If in the past Chinese data reporting to the SEC was inadequate, what Beijing now allows will fall even shorter of legal requirements.
The delistings would be more of a problem for Chinese business were not that foreigners, especially Americans, have been sending huge flows of investment funds to China. To some extent, the American investors are sending funds to China to make up for the lack of Chinese investment options on American exchanges.
Whatever the reasons, the flow has grown huge. Little data is available for 2021, but in 2020 the $1.15 trillion that Americans put into Chinese stocks and bonds in China dwarfed any previous flows. It was, in fact, more than three times the amount of just four years before, an almost 33 percent annual rate of expansion. To encourage this trend, Beijing has given American brokers and investment bankers more freedom than previously to own their operations in China, though at the same time the Chinese authorities have increased their control of the American investment tools these firms have brought with them.
It should be apparent in this little drama that neither China nor Chinese business has lost out. A substitute investment flow has met the primary reason for listing on American stock exchanges in the first place. So far, neither the SEC nor the American government ever had objections to investment flows into Chinese firms, though that may change due to tensions over Russian sanctions.
All Washington has wanted to date is that Chinese firms to abide by the rules that applied generally. With the delistings, the Washington authorities are at least ridding themselves of what was a glaring and unfair double standard on disclosures. And if the American investors pouring their money into China do not worry over the secrecy, duplicity, or double standards imposed by Beijing, that is their business and possibly their loss.
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