Shoppers pass an AliExpress brick-and-mortar retail store, operated by Alibaba Group Holding in Moscow, Russia.
Andrey Rudakov/BloombergAs the U.S.-China relationship deteriorates and bipartisan support for a tougher stance against the world’s second large economy grows in Congress, U.S.-listed Chinese companies could be among those to see blowback this year.
Transparency into Chinese companies has been a longstanding issue, with China barring the U.S. Public Company Accounting Oversight Board, or PCAOB, from seeing corporate audits—describing that as a national security risk. Myriad Chinese companies have listed on U.S. exchanges for years, including heavyweights like Alibaba Group Holding (ticker: BABA) and JD.com (JD). But as momentum to take a tougher stance on China and reassess the U.S. relationship with the country grows, Congress has been moving toward delisting companies that don’t comply.
Many Chinese companies have in recent months sought secondary listings in Hong Kong, including Alibaba, NetEase (NTES) and JD.com, while China’s largest chip maker, Semiconductor Manufacturing International Corp oration, delisted last year.
The proposal to delist companies has passed the Senate and is awaiting a vote by the House. In a video briefing with clients, Gavekal Research’s Arthur Kroeber said there is “a pretty good chance” that legislation requiring Chinese companies to fully meet U.S. accounting oversight standards will pass the House, and if it does, it is almost certain that most Chinese firms will need to delist from the U.S. For the most part, Kroeber expects most companies to relist in Hong Kong rather than Shanghai to keep tapping global liquidity.
Over the longer-term though, some policy watchers are concerned the delisting push could be the beginning of other restrictions on outbound investment in China as the U.S. rethinks its relationship with China on multiple fronts beyond trade and technology. Derek Scissors, a resident scholar at the conservative think tank American Enterprise Institute, said there is precedent for such restrictions—including the capital controls that didn’t allow free investment in the Communist bloc. While he says there is a cost to such restrictions, some limits, when tied to policy, are possible next year, regardless of who wins the election.
The most obvious stocks that could take a short-term hit could be the most well-known companies, like Alibaba, which is often used as a China proxy. But fund managers say Alibaba—and others that have secondary listings in the works—may be a buying opportunity, while those without a secondary listing could face more challenges.
Bank of America highlighted widely-owned Chinese ADRs by growth, value and core large-cap managers. Barron’s screened the list further to find the biggest companies by market cap and those that had logged the biggest gains so far this year for a dozen ADRs that could be at risk for volatility, at least in the near-term, if delistings come to fruition.
Vulnerable Chinese Companies
If delistings come to fruition, these ADRs could be at risk for volatility, at least in the near-term.
BofA Merrill Lynch US Equity & Quant Strategy/FactSet
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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These 12 Stocks Are Vulnerable if U.S. Pushes to Delist Chinese Companies - Barron's
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