Traders work on the floor of the New York Stock Exchange (NYSE) in New York, December 8, 2021.
Brendan McDermid | Reuters
BEIJING – For Americans looking to play the Chinese growth story, Didi’s delisting from the United States shows the growing political risk of investing in Chinese stocks listed in the United States.
After months of speculation, Chinese ridesharing app Didi announced last week that it would be pulling off the New York Stock Exchange and continuing a listing in Hong Kong.
The company raised $ 4 billion in an IPO in late June, but came under regulatory scrutiny from Beijing days later with an order to suspend new user registrations. Didi shares have plunged more than 50% since the IPO.
Although Didi’s situation is plagued by company-specific factors, the fallout around the listing comes as political pressure in China and the United States pushes Chinese companies to trade closer to their headquarters on the continent – at the cost of delisting the United States
De-listing means that a Chinese listed company – like the Nasdaq or the New York Stork Exchange – would lose access to a large pool of buyers, sellers and middlemen. The centralization of these different market players creates what is called liquidity, which in turn allows investors to quickly turn their holdings into cash.
The development of the US stock market over the decades also means that companies listed on established stock exchanges are part of a system of regulation and institutional operations that may offer certain protections to investors.
Once a stock is delisted, the company’s stock can continue to trade through a process called âover-the-counterâ.
But it also means that the stock is outside the system of large financial institutions, significant liquidity, and the ability for sellers to find a buyer quickly without losing money.
âThe most practical thing a typical investor has to worry about is the price,â James Early, CEO of investment research firm Stansberry China, told CNBC.
âYou’re probably going to have to give up (a stock that will soon be written off) sooner or later, so place your bet now,â he said. “Are you better off selling now, or waiting for some kind of rebound?”
Political pressure from both sides
Amid mounting tensions between the United States and China, former U.S. President Donald Trump has taken steps to suppress U.S. investment in Chinese companies, especially those deemed to have suspected ties to the Chinese military.
As a result, three Chinese telecommunications companies, China Mobile, China Unicom and China Telecom, were delisted from the New York Stock Exchange earlier this year.
New measures against Chinese stocks listed in the US only gained ground under the administration of US President Joe Biden.
On December 2, the United States Securities and Exchange Commission completed all preliminary procedures necessary to begin a process for delisting Chinese stocks through the Holding Foreign Companies Accountable Act.
However, the earliest possible end of trade is early 2024, Morgan Stanley analysts predicted in a Dec. 3 note.
In recent years, many large Chinese companies listed in the United States like Alibaba, Baidu and JD.com have made secondary equity offerings in Hong Kong.
In the event of delisting of a New York stock, investors could switch their stocks listed in the United States for those listed in Hong Kong. Not all Chinese companies listed in the United States are eligible for secondary listings in Hong Kong, Morgan Stanley analysts noted.
While the Chinese government has yet to formally ban foreign listings, the new rules announced this summer have discouraged what was once a rush for Chinese IPOs in the United States.
Regulations so far have ranged from data security reviews to industry specific restrictions on the use of the variable interest entity structure. A VIE creates a listing through an offshore shell company, preventing investors in US-listed stocks from having controlling voting rights in the company. The structure is commonly used by Chinese IPOs in the United States
Deregistration is not the end
Chinese stocks were delisted from the US stock exchanges for reasons other than political.
A decade ago, a regulatory crackdown on accounting fraud resulted in a slew of referrals. Other Chinese companies have chosen to return to their home market where they could potentially raise more money from investors more familiar with their business.
Last summer, the Chinese operator of the coffee chain Luckin Coffee was delisted from the Nasdaq after the company revealed manufacturing sales of 2.2 billion yuan ($ 340 million). The stock plunged to a low of 95 cents per share in June 2020.
But the shares rose even after being “over-the-counter” and closed at $ 12.92 each overnight.
Most of the Chinese startups listed in New York in recent years are consumer-focused technology companies.
– CNBC’s Michael Bloom contributed to this report.