Chinese cos listed in US stock exchange suffer following trade war

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China’s equivalent to Twitter, made its debut on the Hong Kong Stock Exchange and suffered a loss. Weibo is listed on Nasdaq since the year 2000, where its shares have lost more than 1/3rd of its value. Chinese companies listed on US Stock Exchanges have been affected by the US-China trade war. Prominent Chinese companies listed in US, such as Alibaba, are now listing themselves in Hong Kong.

Didi, the Chinese equivalent to Uber, has announced that it will completely shift its shares from the New York Stock Exchange to Hong Kong. Didi had listed in New York in June this year. But within days, Chinese regulators restricted online stores from listing Didi’s App, alleging that Didi was illegally collecting user’s personal data. Didi is being investigated by the Cyberspace Administration of China to protect public interest and national security.

Chinese technological firms have been caught in the spat between US and China. The “trade war” started with President Trump accusing China of unfair trade practices and theft of intellectual property. This trade war has turned into a cold war, with both countries imposing sanctions, restrictions, high import tariffs and regulation policies on each other.

Recently, the US Securities and Exchange Commission (SEC) has finalized rules empowering regulatory authorities to delist Chinese companies if their auditors refuse to share information requested by them in compliance with the rules for 3 years. US regulatory authorities have been repeatedly refused access to accounts of Chinese firms for inspection by Chinses regulators. These rules are compelling Chinese firms to list in Hong Kong. Their shares have suffered loss in both US and Hong Kong markets.

At its core, “the finalized rule will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the PCAOB (Public Company Accounting Oversight Board) cannot completely inspect. Moreover, foreign issuers will be required to disclose the level of foreign government ownership in those entities,” said an SEC official.

Before this, Beijing had announced stricter control over foreign listings of Chinese companies. China already has restrictions on foreign listings. Chinese companies, including Didi, avoid these restrictions by operating from an off-shore company.

Investors of Chinese companies listed in US Stock Exchanges face one of the following outcomes if that Chinese company delists/is delisted: Chinese company decides to go private and buy backs shares from the investors. Shareholders decide the price; Share Transfer – Investors could exchange their American Depository Receipt (ADR) for the Chinese Companies’ foreign stock. This requires the company to be listed on more than one stock exchange; Shares of foreign companies listed on US Stock Exchanges are bundled into ADR by US Banks. They are traded as stock in dollars. In this way, foreign companies gain access to US capital.

The Chinese company delists but doesn’t buyback shares nor does it list anywhere else, the shares will be in limbo. Investors still own shares but cannot trade them. They can continue to hold them and wait for a listing or sell them over-the-counter, though it will be at a far lesser value.

Chinese companies are fearing restrictions in Europe as well. China has been accused of restricting investments from foreign companies in the technology sector. Foreign companies have alleged that China is mandating transfer of advanced technological know-how and intellectual property to Chinese companies in joint venture agreements.

On the other hand, Chinese companies are being pushed to use domestic technology even if superior foreign alternatives are available.

In September, Chinese officials pulled up Tencent and NetEase, two well-known gaming firms, over regulatory issues. Tencent also owns WeChat, China’s biggest instant messaging application. It also has a significant investment in Didi.
China has not allowed US-based social media platforms, like Twitter and Facebook, to launch in China. Hence, domestic platforms like WeChat and Weibo have flourished.

Apart from gaming, NetEase also provides music streaming services and has a news app. It is also the provider of China’s largest free e-mail service. NetEase launched its headquarters in US in August, 2014.