US-listed Chinese tech companies face a tough decision on whether to leave the US and return to homeland exchanges after the US Securities and Exchange Commission (SEC) started enforcing a new law that threatens to delist overseas companies that consistently fail to comply with US auditing standards.
The new Holding Foreign Companies Accountable Act requires accounting firms to let US regulators review overseas companies' audits. If a company's auditors fail to comply for three consecutive years, its stocks could be delisted from US exchanges.
Legislated by the former Trump administration, the new SEC rules were set to apply to all non-US companies. Still, many market watchers and foreign policy experts reached the consensus that the US-listed Chinese companies are specifically targeted.
This move came against the backdrop that the US-China battle for tech supremacy escalated into a decoupling of both economies.
The shares of US-listed Chinese companies plunged by double digits following the announcement. iQiyi, Vipshop, Tencent Music, GSX Techedu were the worst performers, whose shares tanked over 30% on average over the past week.
Explaining the price volatility, Brendan Ahern, who runs an ETF fund that focuses primarily on China concepts stocks, said that some funds recently started huge block trades to liquate their positions in China stocks because of fear of delisting.
"The only logical explanation for this kind of selling size is there is some real fear of delisting or some of the political uncertainties going on between the US and China," Adhere said.
The political uncertainties have prompted some Chinese companies to hedge against the risk by seeking alternatives, including relisting at home or launching their secondary listing.
Recently, China has witnessed a wave of US-listed companies returning to the mainland for a second IPO.
In early March, Chinese search engine giant Baidu, which is already listed in the Nasdaq since 2015, raised USD3.1 billion in the Hong Kong secondary listing.
At the launching ceremony, Baidu CEO Rolin Li said returning to Hong Kong was a homecoming. Chinese video-streaming platform Bilibili, whose share saw an upward trend since listing on the Nasdaq in 2018, followed Baidu's step to debut a secondary Hong Kong listing, raising about HKD20.2 billion on the exchange this month.
According to data compiled by Refinitiv, Chinese companies raised USD9.6 billion across 22 deals on Hong Kong Stock Exchange in the first two months of 2021, making the highest-ever IPO proceeds raised on the city's stock exchange for the first two months of January and February.
In February, Tencent-backed Kuaishou Technology, the biggest rival of Bytedance's domestic short video app Douyin, saw its share surged more than double to HKD300 on the Hong Stock Exchange debut.
"Large scale delisting of Chinese companies from the US is unlikely to happen, but the US is no longer the top priority for Chinese companies to go public, Chinese companies have multiple choices such as Hong Kong, Shanghai's STAR Market and other mainland exchanges," Sun Yan Biao, a senior analyst at consultancy firm iMeida told PingWest.
Sina, the operator of the microblogging site Weibo, chose a different option. The company delisted from the Nasdaq and completed a USD2.6 billion privatization earlier this month.
There is some speculation that the firm would relist at homeland exchange such as Shenzhen Stock Exchange and Shanghai's Star Market.
"There will be more companies returning homeland to go public because of priorities dedicated to new exchanges," Sun said.
In July 2019, Shanghai launched a Nasdaq-style tech board called Start Market, with anticipation that the Star Market will nurture Chinese firms' growth in crucial areas such as chip manufacturing, biotechnology, electric-car battery manufacturing.
The STAR Market differs from the country's other main exchanges in several ways.
One of the differences is that the STAR market lowers the entry barriers that allow companies that are not profitable to list. Companies that aim to list on the STAR Market do not meet the three-year profitability criteria on China's other stock exchanges.
However, some scholars are skeptical about the new exchanges' feasibilities concerning that the STAR market would be another unsuccessful venture just like the previous attempts.
In the past, China has tested and launched other stock exchanges to build China's own Nasdaq. Unfortunately, the venture did not go well and disappointed Chinese policymakers. For example, the Shenzhen Stock Exchange's ChiNext board and over-the-counter equity market (also known as the New Third Board) have seen the trading volume drop sharply in just a few years after launch caused by excessive speculation in the short term and corporate cheating on the financial report.