For months, federal regulators have increased pressure on Beijing and Chinese companies that trade on U.S. stock exchanges to comply with American listing rules.
But on Friday, five of China’s biggest U.S.-listed, state-owned giants, valued at a collective $318 billion, announced they would exit Wall Street instead, marking an acceleration in the U.S.-China financial decoupling.
State insurer China Life Insurance, energy behemoths PetroChina and China Petroleum & Chemical Corporation, alongside Aluminum Corporation of China, and Sinopec Shanghai Petrochemical, all said Friday that they will delist from the New York Stock Exchange (NYSE), as Washington and Beijing continue to jostle over letting American inspectors audit Chinese companies. The fight could lead to hundreds of China-based companies being booted from U.S. stock exchanges.
Just in case, Chinese businesses are preparing to be kicked off of Wall Street. “The state-owned firms are seeing that the writing is on the wall for them,” Liqian Ren, director of modern alpha at investment firm WisdomTree Asset Management, told Fortune, and indicates that a bigger shift might be underway for other public China-based companies as well.
Business decisions
The U.S. and China are at loggerheads over a decades-long dispute over allowing American inspectors to audit U.S.-listed Chinese firms. The U.S.’s audit watchdog wants full access to Chinese companies’ auditors and audit papers, but China has refused, citing national security concerns. The U.S. could delist over 260 Chinese companies worth a combined $1.3 trillion by 2024 if Washington and Beijing can’t reach an agreement.
China’s securities regulator said in a Friday statement that “listings and delistings are… common in capital markets.” It added that the five state firms followed U.S. rules while listed on American stock exchanges, and that their delisting decisions were only “made out of business considerations.”
Other U.S.-listed Chinese firms could follow in the footsteps of the five state-owned enterprises (SOEs). The two remaining Chinese SOEs listed on U.S. stock exchanges—two state-linked airlines—will “definitely be considering” delisting from New York, Ren says. China’s state-run firms all hold information that Beijing deems sensitive or crucial to national security that it doesn’t want American inspectors to access, meaning that it wouldn’t come as a surprise if the remaining state firms choose to delist soon, Brendan Brendan Ahern, chief investment officer at KraneShares, a China-focused investment fund, told Fortune.
Yet this hedge isn’t limited to state firms. Other Chinese firms want to retain their U.S. listings. But they’ll ultimately “review the situation and make a strategic choice,” Ren says. For most big firms, they’ll feel that a U.S. listing is risky and opens them to being caught in the crossfire between Chinese and American regulators, especially in the face of deteriorating Sino-U.S. ties, she says.
And non-state linked companies have been moving to reduce those risks. On July 29, the U.S. Securities and Exchange Commission (SEC) added Chinese tech behemoth Alibaba—which raised $25 billion in 2014 in the U.S.’s biggest-ever IPO—to its delisting watchlist. Alibaba announced that it is changing its Hong Kong listing from a secondary to primary status, which allows it an exit route in case of delisting—and one that lets it tap mainland China investors.
Stifled progress
In recent months, the SEC has continued to add Chinese companies to its now-long list of firms that face expulsion from American stock exchanges. SEC chair Gary Gensler has reiterated that the U.S. will accept nothing less than full compliance from China.
Beijing reportedly wants to strike a deal with Washington that would separate U.S.-listed Chinese firms based on the type of data they hold. China is seeking a compromise to let most non-state owned firms open their books to American inspectors, but restrict reviews of state firms and tech companies that hold sensitive information, Adam Montanaro, investment director of global emerging markets equities at investment firm abrdn, told Fortune earlier this year.
While “China does have incentives to improve their relations with the U.S., [their ties] have been seriously damaged in the last few years. The trust is very low, especially with the recent Taiwan flareup,” Ren says. At the same time, U.S. regulators have been very clear that they want full access and compliance. There’s not going to be a two-tier system of access” that Beijing desires, she says.
Ahern however, argues that the five state firms’ delistings are a positive sign that Washington and Beijing might be closer to reaching a delisting consensus. Once Chinese SOEs are all delisted from Wall Street, the “remaining non-state companies have long-stated that they have nothing to hide” from U.S. inspectors, Ahern says.
Still, the SEC’s delisting watchlist has only grown larger—and the challenges for U.S.-listed Chinese firms more difficult. The SEC has now flagged 159 firms, including Alibaba’s e-commerce rival JD.com, social and blogging giant Weibo, KFC parent Yum China, and biotechnology firm BeiGene, to be expelled from Wall Street if they don’t comply. Washington “clearly won’t give an inch. There is no compromise to be had. The Chinese side [must] do all the conceding,” China-focused research firm Trivium wrote in an April note.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
