Selena Li, Samuel Shen

SHANGHAI/HONG KONG -As a long-standing Sino-U.S. diplomatic dispute threatens to drive Chinese companies from American stock exchanges. Global equity investors are looking for ways to keep or increase exposure to China’s second largest economy.

The fund managers have begun to plan or accelerate a move out of Chinese American Depository Recipts (ADRs), into Hong Kong-listed counterparts. They also intend to buy more mainland shares. Investors are going to great lengths to pressure U.S.-listed Chinese firms not yet listed in Hong Kong.

Meanwhile, retail U.S. investors with no access to Hong Kong’s markets have begun dumping Chinese ADRs after the U.S. Securities Exchange Commission https://www.reuters.com/business/us-sec-mandates-foreign-companies-spell-out-ownership-structure-disclose-2021-12-02(SEC) this month finalised rules to kick non-compliant Chinese companies off American exchanges in three years.

“It looks like we’re going down the track where these companies will be delisted from the United States,” said Thomas Masi, New York-based partner and equity portfolio manager at GW&K, citing lingering tensions https://www.reuters.com/world/china/us-builds-new-software-tool-predict-actions-that-could-draw-chinas-ire-2021-12-15 between the world’s two biggest economies.

Washington demands complete access to U.S.-listed Chinese companies’ books, but Beijing blocks foreign inspection of local accounting firms’ working papers. This auditing dispute could threaten hundreds of billions in U.S. investment.

Goldman Sachs (NYSE 🙂 believes that 25% of China’s $1 Trillion market value is at American investors.

Rethinking is required by the rules. GW&K’s Masi said the asset manager is reviewing its retail-focused ADR strategy “to see if they do have long term viability.”

Individual U.S. investors flocked out https://www.reuters.com/markets/stocks/retail-investors-added-didi-selloff-after-delisting-news-2021-12-06 of Didi Global after the Chinese ride-hailing company unveiled plans on Dec.3 to withdraw from the New York Stock Exchange and pursue a Hong Kong listing.

SHARE SWAP

Refinitiv Eikon data revealed that the uncertainty caused an almost halving in the Chinese ADR market capitalisation over the past year to $828 billion.

The strategy for GW&K’s emerging market fund, which owns shares in Chinese companies including Alibaba Masi stated that Trip.com Group and (NYSE:) are to exchange ADRs for their Hong Kong-traded shares. However, only when liquidity improves.

KraneShares chief investment officer Brendan Ahern stated that he’s also open to making the change when necessary.

Ahern stated that “we’ve got the trigger to make this migration” in a webinar. This was after Didi was delisted by the SEC and other factors sent Chinese tech shares plummeting. “We are not going to sit idle while these companies vanish.”

New York-based China-focused asset manager has a $7.5B exchange-traded Fund (ETF). The ETF tracks China Internet stocks and U.S.-traded JD.

Simply tell your custodian you would like to do that conversion. To convert your U.S. name to the Hong Kong share classes, ADR custodian banks charge around 4 cents per share

DUAL LISTING

EY reports that 5 of the Top 10 Hong Kong Listings in 2021 were Secondary Listings of U.S.-listed Chinese Companies, such as Bilibili and Baidu (NASDAQ;) Inc.

Lawrence Lau, EY Greater China Financial Accounting Advisory Services Leader said that “U.S.-listed companies are coming home” is a big trend. Hong Kong could be a platform that allows them to trade their shares normally if they cannot exchange their shares in the U.S.

Many companies already do this, which makes it easier for investors.

Aaron Costello from Cambridge Associates in Beijing is the regional head for Asia.

Nuno Fernandes, partner and portfolio manager at GW&K, said he is pressing companies which are lagging.

“We’re having active conversations with the management of those companies, and we are sending them a clear message: it’s your obligation to pursue all the opportunities to dual-list in Hong Kong as soon as possible,” he said.

Numerous companies have already done this, and those who haven’t “better” have very strong reasons why they aren’t dual-listed. They plan on resolving it.

Philip Li from Wellington Management Co was the investor director. He said that “the worst possible scenario is for ADRs to be delisted, and there would be no place else to go”.

Go to SOURCE

Some Chinese investors choose to go directly to China’s growing deregulated market.

Catherine Hickey (Vice-President, consultancy Segal Marco Advisors) stated that the majority of emerging market managers they use now prefer to direct their investments into Chinese companies via the A share market. It is becoming more liquid and open.

It doesn’t matter if ADRs are fewer.

Morgan Stanley (NYSE:) Also recommends China-listed A shares, but cautions against the MSCI China Index, which is roughly one-fourth its weightings ADRs.

“In the next three years, we’re going to see very few IPOs of Chinese companies in the U.S., if any,” said GW&K’s Fernandes.

“So by definition, the focus is going to be more on the mainland Chinese market, because that’s where the IPOs are going to come from.”