(Bloomberg Opinion) – The US threat to wipe out Chinese businesses just got a lot more real. Yet companies from Asia’s largest economy remain lined up to sell shares on U.S. exchanges – and thrive. What is the matter?
The president’s working group on financial markets has told U.S. exchanges to introduce rules that require companies to allow U.S. regulators access to their countermeasures, something China has refused to allow. Companies already mentioned will have to comply by January 1, 2022, with removal of the US exchanges the ultimate penalty. Those who want to sell shares will have to comply with the new rules, according to the highly-motivated group of U.S. regulators, which includes Treasury Secretary Steven Mnuchin.
You might think that this ratcheting up of pressure, which is increasing geopolitical tensions and the outbreak of accounting scandals at Chinese companies like Luckin Coffee Inc. reflects, a damper would put on the rush of companies that want to go public. Everything but. Almost every day, it seems, another Chinese company announces plans to list in the US – and they find no shortage of takers.
Last month, the production Li Auto Inc. added. of electric cars from Beijing $ 1.1 billion sold shares in an initial public offering that prices above the marked range. It was the largest IPO by a Chinese company in New York since Shanghai-based rival NIO Inc. sold $ 1.15 billion in stock in September 2018. Guangzhou-based Xpeng Motors is ready to follow suit this month.
Shares of US-listed Chinese companies also outperform the broader market. The Nasdaq Golden Dragon China Index increased 30% this year, compared to a 3.7% gain for the S&P 500.
The phenomenon may in part be the product of a day-to-day craze fueled by pandemic lockdowns, which has led many Americans to stop at home in search of entertainment. If the Robinhood public can drive shares of bankrupt companies to illogical heights, then why not Chinese shares as well?
On a more rational level, some investors may bet that threats to wipe out Chinese companies are for the most part loud, and that a compromise will eventually be worked out. Chinese ads are a jus train for the New York Stock Exchange and Nasdaq, and both sides have a financial interest in making sure it is not derailed.
At this point, it is worth noting that US regulators left some room for maneuver. Chinese companies can hire a ‘co-auditor’, who has effectively conducted a second inspection by a US accounting firm after a Chinese branch does the first. That could be a potential solution to Beijing’s rules that prevent the Public Company Accounting Oversight Board from auditing US-listed Chinese companies.
However, counting on the outbreak of peace can be outrageous. There is ample evidence that the move toward a US-China withdrawal is serious and tangible. Just look at the extended list of Chinese US-traded companies selling shares in Hong Kong, and give them a secondary outlet in international capital markets in case they are forced to leave: Alibaba Group Holding Ltd., JD.com Inc. and NetEase Inc. among them.
Or witness Tencent Holdings Ltd., which lost $ 30 billion of market value in Hong Kong on Friday after the Trump administration moved to ban U.S. residents from doing business through its WeChat app. It will be a brave investor betting on this trend that is reversing itself.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Opinion columnist who deals with deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and reporter.
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