Singapore’s Lianhe Zaobao published an article that the Chinese companies plan to withdraw 293.5 billion Chinese capital and put aside their plans to list in the U.S.. According to this report, Chinese companies chose to shelve their plans to list in the United States due to concerns about the uncertainties in the economic and trade relations between the two major economies. Instead, some Chinese companies have changed their listing destination to a closer market. The report claimed that the U.S. should worry about the negative effects of the outflow of Chinese funds on the U.S. economy since according to an authoritative report, Chinese direct investment in the United States has fallen to $5 billion (about 35.4 billion RMB) in 2019, the lowest since the global economic recession in 2009. It is also lower than that in 2016 ($46.5 billion). The peak fell by 41.5 billion dollars (about 293.5 billion RMB).
The Chinese companies are indeed delisting on the U.S. market, but not because they voluntarily withdrew due to uncertainty concerns, instead, a series of investigations for financial misconduct and the possibility of passing the Holding Foreign Companies Accountable Act could potentially sentence them to death.
A symbolic incidence is an investigation on Luckin Coffee (NASDAQ: LK) that on January 31st, 2020, short-selling firm Muddy Waters Research published an anonymous 89-page report on Twitter, claiming that Luckin Coffee had falsified financial and operational figures totaling about $310 million. The report claimed that the number of items sold per store was inflated by at least 69% in the third and by 88% in the fourth quarter of 2019. Shortly after, the Nasdaq has sent the company a delisting notice, due to “public interest concerns” given the “fabricated” transactions disclosed by the company in its annual report, and because of the company’s past failures in publicly disclosing material information.
Adding to Chinese companies’ woes, Democratic Rep. Brad Sherman of California rolled out the Holding Foreign Companies Accountable Act. The bill passed the Republican-controlled Senate On May 20th with unanimous support. The bill could see a “swift passage”, according to analysts. The bill requires that foreign companies let the Public Company Accounting Oversight Board oversee the auditing of their financial records if they want to raise money by selling stocks or bonds to the American public. All U.S. companies and most foreign firms already work with the PCAOB in this way, but Chinese firms do not. The bill could ultimately bar many Chinese companies from listing their shares on U.S. stock exchanges or otherwise raising money from American investors.
President Trump also signed a memorandum on June 4th on Protecting United States Investors from Significant Risks from Chinese Companies. The memorandum pointed out that the Chinese government has consistently prevented Chinese companies and companies with significant operations in China from abiding by the investor protections that apply to all companies listing on United States stock exchanges. The time has come to take an orderly action to end the practice that has tacitly permitted companies with significant Chinese operations to flout protections United States law requires for investors in United States markets.
The storm of investigations and actions toward Chinese companies will determine whether more than 200 Chinese companies listed in the U.S. can continue to trade in the U.S., including famous ones such as Alibaba, Baidu, and J.D. It also includes well-known Wall Street brokers such as Goldman Sachs and JPMorgan Chase, who have significant operations in China.
- Cover photo: https://www.fool.com/investing/2020/05/21/chinese-companies-delisted-us-stock-what-means.aspx