Explained: Why Chinese Companies Are Delisting From US Stock Exchanges

Earlier this month, five Chinese companies, backed by the communist regime in Beijing, announced that they would be delisting from the New York Stock Exchange (NYSE), citing increased diplomatic and trade tensions with the United States.

The companies include Aluminium Corporation of China, PetroChina, Sinopec Shanghai Petrochemical Co, China Life Insurance and Sinopec. Releasing separate statements, the companies announced the delistings of their American depository shares by the end of August.

However, in the statements, there was no mention of Nancy Pelosi, the Speaker of the US House of Representatives, or her trip to Taiwan, nor the auditing row that has surfaced as a consequence of the Holding Foreign Companies Accountable Act (HFCAA).

In June, the Chinese equivalent of Uber, Didi, also voluntarily delisted from the NYSE, merely eleven months after its $4.4 billion IPO. The likes of Alibaba are also on the watchlist of the American regulators and could be delisted if compliance issues remain.

What Is The Holding Foreign Companies Accountable Act (HFCAA)

Introduced during the previous regime and signed by former president Donald Trump in September 2020, the HFCAA was proposed by the legal and regulatory authorities in the US to ensure greater scrutiny and transparency regarding auditing the Chinese companies listed in the US.

As per the rules, the US Securities and Exchange Commission (SEC)-appointed Public Company Accounting Oversight Board (PCAOB) can inspect auditors of the publicly traded companies.

Under HFCAA, the companies refusing to comply or disclose audit records before the PCAOB could be delisted by 2024. In March 2022, the SEC started publishing a list of the companies that could be delisted from the American stock exchanges, citing non-compliance.

Simply put, the SEC wanted to ensure that the American money going into Chinese companies was not used to run shell companies or organisations with shoddy reputations and records.

Beijing’s Bluff Called Out

Since 2008, the number of companies listing on the US stock exchanges has steadily increased. However, the headquarters of most of these companies were in Beijing or Hong Kong. Therefore, no audit reports and other financial records were made available to the regulators in the US in the garb of state secrets and national security concerns.

Between 2006 and 2012, around 400 companies from China found their way to the stock exchanges in the US. However, 80 per cent of these companies were ‘reverse mergers’.

Small-time Chinese companies no one had heard of partnered with shell companies in the US that were listed on the stock exchange but existed only on paper in terms of operations, thus facilitating a reverse merger.

This gave these small companies from China access to investors in the US who were looking to make a quick buck to overcome their losses from the 2008 crash. While the presence on any US stock exchange validated these Chinese companies' existence, the US investment firms milked the trade on these shares through hefty commissions.

As banks had used rating agencies in 2008 to validate financial instruments like credit-default swaps (CDS) and collateralised debt obligations (CDOs), China began using auditors and investment firms in the US to drive capital from the US to China and thus use the calamity of the West as an opportunity of its own.

Eventually, the bubble was busted as companies inflating their revenues by ‘n’ number of times could not keep up with the investor sentiment. Many companies sank, with them sank wealth worth $14 billion that belonged to the American people in the form of pension and retirement funds.

This phenomenon of financial fraud was elaborately documented in a Netflix documentary, The China Hustle.

China’s Response

According to a report in July 2022, China was looking to comply with the HFCAA, segmenting the listed companies into three categories based on the data they were handling (non-sensitive, sensitive, and secret).

For both the US and China, the mass delisting of 250-odd companies would dent the $1.3 trillion shareholder value, and hence, a middleground was being pursued.

Companies like Didi, with critical information about locations, including the residences of the top CCP leaders and other government buildings, were a no-go for Beijing. For companies with non-sensitive data, however, compliance was being considered.

What’s Next

The unfolding Wall Street crisis is ushering in the following trends.

One, the Chinese companies are now looking for listings elsewhere, including Hong Kong and Singapore. While this could hamper the investment aspirations in the US, the money is expected to flow through other funds and institutions.

Two, this would accelerate the economic decoupling between the US and China. Companies within the semiconductor ecosystem are already being asked to pick a side after the US CHIPS and Science Act.

Three, it is also about avoiding major concessions and acting tough against China for the Joe Biden government that has been pushed to the wall after an unprecedented phase of inflation and shrinking growth in the US. Thus, as the mid-terms approach in November, the SEC’s stance will only toughen.

Four, for President Xi Jinping, the decoupling could also result in the further denting of the real estate sector that for long has relied on dollar-dominated bonds to raise funds. As the October Congress approaches, where Xi would want to firm his term for a lifetime, the focus would be to keep the flock together amid tensions with the White House.