Selena Li and Samuel Shen

SHANGHAI/HONG KING (Reuters) – As a long-running Sino – U.S. diplomatic spat is about to end, global equity investors are looking for ways to increase or retain exposure to the second-largest economy in the world.

Some fund managers plan to accelerate or shift away from Chinese American Depository Receipts into Hong Kong-listed counterparts or buy more shares on the mainland. Some investors go so far as to demand that U.S. listed Chinese companies are immediately listed in Hong Kong.

In the meantime, U.S. retail investors who do not have access to Hong Kong’s ADR markets began to dump Chinese ADRs. This was after U.S. Securities Exchange Commission(SEC) last month finalized rules to remove Chinese non-compliant companies from American stock exchanges.

“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 between the world’s two biggest economies.

Washington wants complete access the U.S.-listed Chinese businesses’ books. Beijing, however, blocks foreign inspections of work papers of local accounting firms. The dispute is an auditing issue that could cost hundreds of millions of dollars in U.S. investments.

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

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

DidiGlobal was withdrawn by individual investors from America after Didi Global announced its plans Dec.3, to leave the New York Stock Exchange, and instead seek listing in Hong Kong.

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Refinitiv Eikon data also showed that uncertainty led to a nearly halving the market capitalization of Chinese ADRs in the last year, which was $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,” during a webinar. This was after Didi was delisted by the SEC and other factors sent Chinese tech shares plummeting. We won’t sit back and let these companies disappear.

New York-based China-focused asset management firm, headquartered in New York, manages a $7.5 Billion exchange-traded funds (ETF) that tracks China’s internet stocks, including U.S. traded JD (NASDAQ.com). It has also tested conversions to Hong Kong listings, and they proved operationally straightforward.

Simply tell your custodian you would like to do that conversion. You pay 4 cents per share for the ADR custodian bank to convert those shares. Within minutes, you have your U.S. names converted into Hong Kong’s share class.

DUAL LISTING

EY estimates that five out of 10 top Hong Kong listings for 2021 included secondary listings from U.S.-listed Chinese companies, including Bilibili (NASDAQ) Inc.

Lawrence Lau of EY Greater China Financial Accounting Advisory Services said, “U.S. listed companies returning home is the major 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.”

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

Catherine Hickey is vice-president of Segal Marco Advisors. She said that most emerging market managers use the A-share Market to directly invest in Chinese companies. This market has become more open and liquid.

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.”