Why do many Chinese companies want to be US listed?

Chinese companies

200+ Chinese companies listing in US stock market

According to statistics at the end of May 2022, there are currently 248 Chinese companies that are listed on a U.S. stock exchange, either directly or as an ADR. Everyone must be very suspicious that China has its own three stock exchanges in Shanghai, Shenzhen, and Hong Kong.

US does not welcome Chinese companies listing on US stocks

Even though US officials have become increasingly unfriendly to China in recent years, they have continuously introduced various policies that are unfavorable to Chinese companies. For example, in 2020, Trump ordered the U.S. federal pension fund not to invest in Chinese companies, and SEC Chairman Jay Clayton even announced it in April 2020. When I was interviewed by Fox Business Network, publicly urged American investors not to buy Chinese stocks.

Reasons for Chinese companies to go public on U.S. stocks

But why are so many Chinese companies going to the U.S. stock market one after another?

Regulatory restrictions

The more important regulatory restrictions include the following:

U.S. stocks are listed in a registration system, while China stocks use an approval system. This means that all listings on the Chinese stock market require official review and approval. The registration system pursues the long-term value growth of the company and looks at the future, the market and investors determine the value of a listed company. The approval system pursues the short-term financial stability of the enterprise. It looks at the past, and the government checks and filters for investors.

Many companies have even queued for two or three years, and in the end they still fail to pass the official review. Because of this, it is easy to form a barrier. Often hundreds of companies are waiting for approval for listing. In the market, time is money, and companies may lose the most valuable opportunity to go public and cause heavy losses. For this reason, in 2020, the China authorities decided to remove the barriers to listing and change to the registration system in the future.

In order to protect the rights and interests of the investment public (a Goldman Sachs report at the end of 2019 revealed that the Shanghai and Shenzhen stock markets had more than 80% of the retail investors). The net profit for three consecutive years did not exceed RMB 100 million, and the listed companies that did not meet the standards the application will be withdrawn. This requirement alone will kill all startup companies, because most startup companies do not have a net profit.

Companies with dual class shares structure design cannot be listed in China. In 2012, Alibaba (ticker: BABA) was forced to go public in the U.S. stock market in 2014 due to this regulation and became the largest IPO in U.S. stocks in history. However, in order to compete with the US stock market, this regulation of the Hong Kong stock market has been cancelled in 2018. In 2020, the Shanghai stock market has also begun to accept the listing of companies with dual class shares structures.

A company like Luckin Coffee (ex-ticker: LK) to be listed on the US stock market in less than two years after its establishment. It is impossible to happen in China stock markets.

The China Securities Regulatory Commission requires shareholders who have invested in shares 12 months before listing to lock up their funds for three years and cannot sell their shares during this period.

Before 2017, foreign companies cannot be listed on the mainland stock market.

Even if it is listed in Hong Kong, the rules are more stringent than those in the United States, including minimum profit restrictions and other requirements. U.S. stocks are obviously much more relaxed in this regard. The China authorities have begun to conduct data reviews of every company that went public overseas, but the review of listing in Hong Kong will be much more relaxed than the review of going to the United States.

Valuation

The valuation of US stocks is the highest among all stock markets in the world. Compared with the Taipei stock market, the TSMC ADR (ticker: TSM) premium is more than 10% in most of the time; the same situation also happen in many stocks that are listed on both US stocks and Hong Kong stocks or European stocks at the same time.

Capital

China is still a country that strictly controls foreign exchange, and foreign exchange remittance are still very inconvenient. There are many restrictions for foreigners to invest in the China stock markets.

A shares and B shares stock market: The Shanghai and Shenzhen stock markets are also divided into A shares and B shares. It is stipulated that only Chinese can buy A shares, which causes the liquidity and price difference of B shares to be too large and loses the meaning of the original design. Because of this, since 2017, China has begun to gradually relax various restrictions on foreign investment in China stocks.

China’s stock market is relaxing listing conditions

With the establishment of a new innovation version of China’s Shanghai A shares market (to benchmark the Nasdaq stock market in the United States), China’s new startups are encouraged to list on the China stock markets. Hong Kong has begun to accept dual class share companies, relax the listing of loss-making biotech stocks, and most Chinese companies listed in the United States have completed the dual listing in US and Hong Kong in the past year or two. All these developments show that China’s stock market is becoming more open.

The long-term goal is to directly compete with U.S. stock markets. It is hoped that all Chinese companies can stay listed in China’s three major stock markets. In May 2021, it was reported that the regulators in China were pressuring Himalaya FM (ex-ticker: XIMA), Xiaohongshu, and Lingkrypton Technology, which had already submitted documents to US stocks, to abandon the US IPO and go to Hong Kong for their listing. However, in the short to medium term, U.S. stocks are still very attractive to Chinese companies (especially the technology industry) compared to China’s three major stock markets.

Chinese companies
credit: bones64

China government to restrict Chinese companies from listing in US

Sure enough, on 7/8/2021, many Chinese companies that have submitted listing applications to U.S. stocks have automatically withdrawn or suspended their ongoing listings in the U.S. According to media reports that Chinese companies (mostly under the VIE structure) are listed overseas, the approval of the Chinese authorities will be required before they can be released. In particular, the payment and transportation industries involving a large amount of domestic data in China bear the brunt.

Foreign listings must be approved before they can be released. Didi Chuxing (ticker: DIDI) ignored Chinese officials’ persuasion to postpone its listing in the United States and started various anti-monopoly investigations, resulting in a sharp drop of more than 50% after only three weeks of listing. On 7/23/2021, it was reported that the Chinese authorities intend to prohibit the listing and financing of supplementary education companies and must transform into a non-profit organization. On the same day, New Oriental (ticker: EDU), which was listed on the US stock market, plummeted 54.22%, and TAL Education (ticker: TAL) plummeted 70.76% , Gaotu Techedu (ticker: GOTU) plummeted 63.24%, NetEase Youdao (ticker: DAO) fell 42.81%.

Discipline training institutions were uniformly registered as non-profit institutions, are not allowed to go public for financing, and capitalization operations are strictly prohibited–This means that the stocks of these companies will soon become zero valued.

At the end of July 2021, the U.S. Securities and Exchange Commission (SEC) has suspended processing Chinese companies’ initial public offering (IPO) applications, and is formulating new guidelines requiring Chinese companies listed in the U.S. to disclose the risks of Beijing’s “regulatory suppression” .

Foreign reports have reported that there are more than 20 Chinese companies that have abandoned the U.S. listing.

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