US pressure could accelerate growth in Greater China markets

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Chinese tourists with face masks stand in front of the New York Stock Exchange (NYSE) on February 3, 2020 on Wall Street in New York.Johannes Eisele | AFP | Getty Images

US pressure on Chinese stocks is expected to accelerate the growth of the capital markets in Hong Kong and mainland China, as investors remain determined to seize opportunities in the world’s second largest economy.Congress is considering a new law that could force Chinese companies to withdraw their shares from the US stock exchanges. The move builds on existing tensions between the United States and China, which began in earnest two years ago on trade, and have since spilled over into technology and finance. In mid-May, the administration of US President Donald Trump asked a federal pension fund to stop investing in Chinese stocks.

The revelation in April of a major fraud to Luckin Coffee – which sold itself as a Starbucks rival in China – has accelerated US concerns about the lack of transparency in Chinese businesses.

“Luckin poisoned the well,” said Blueshirt chief executive Gary Dvorchak, who advises Chinese companies interested in listing in the United States. “I foresee a very, very difficult environment. “

At the same time, the major international managers of stock and bond indices have started to include Chinese mainland assets, after years of observation. The inclusion automatically adds Chinese stocks to many investment funds. Fund managers looking for long-term growth opportunities have increasingly turned to China, even before the coronavirus pandemic shocked global growth.

Covid-19 appeared at the end of last year in the Chinese city of Wuhan. Since then, it has infected more than 7.3 million people and killed more than 416,000 people.

The epidemic stalled in China in mid-March. Economists expect the country to continue growing this year, as they predict that developed countries like the United States will contract. The Asian giant is also home to some of the largest tech start-ups in the world.

“Depriving investors of large, growing companies is a big mistake, and it will have a significant effect on the US financial market,” said Brendan Ahern, US-based investment manager at KraneShares, fund manager, in a telephone interview. traded on the stock exchange. the week. “More investment bankers in Hong Kong, more lawyers, more traders – this will have a real impact on the US financial sector, the New York metropolitan area as the financial hub (for) American capital. ”

The New York Federal Reserve has found that the trade war between the U.S. and China has reduced the market capitalization of U.S.-listed companies by $ 1.7 trillion, and new investments are expected this year, according to a study published in late May.

Foreign funds flock to China

In April, the allocation to Chinese assets among more than 800 funds remained unchanged from the previous month at almost a quarter of nearly $ 2 trillion in assets under management, according to the latest data available from the EPFR. The data covers nine categories of securities listed in mainland China, Hong Kong, Taiwan, the United States and Singapore.

Restrictions imposed by the Chinese government on cross-border capital flows have made it difficult for foreign funds to access domestic markets, making Hong Kong a more attractive option for international investors wishing to exploit China.

Underdeveloped regulation on the continent has also led to a rather brutal approach to controlling the Chinese stock markets, which are dominated by retail investors who tend to speculate rather than invest for the long term. For years, many have dubbed the Mainland China Stock Exchange a “casino.”

However, analysts say the Chinese markets are slowly maturing as more local institutions invest and regulation improves.

Interest by foreign investors in mainland Chinese stocks has also increased. At the end of May, the Shenzhen Stock Exchange issued an alert indicating that the foreign investment ratio in three stocks was approaching the 30% limit, the first time that such an opinion was issued for three companies, according to the National Business Daily. from China.

Foreign funds represented 3.5% of the A shares available for trading, according to data available via Wind Information, a financial database.

More IPOs in Hong Kong, Mainland

As American political pressure accelerates, Chinese companies listed in New York are quickly turning to Hong Kong.

The US Securities and Exchange Commission is scheduled to hold a roundtable on July 9 to hear the views of investors and others on the risks of investing in emerging markets like China. UBS regulatory affairs experts expect the US House of Representatives to pass new legislation against Chinese IPOs by the end of August, according to a note on Tuesday.

Prior to these potential changes, NetEase held a secondary securities offering in Hong Kong on Thursday, while Chinese e-commerce and logistics company JD.com is also planning a secondary listing in the coming weeks.

“If you are a publicly traded company anywhere in the world, this uncertainty is a significant risk. There is no way around this, “said James Early, CEO of investment research firm Stansberry China, in a telephone interview last week. “The second idea for enrollment will be much more acceptable than just leaving the United States. ”

Many Chinese companies have sought to register in New York for brand benefits and build capital outside of China’s border controls. As tensions between Washington and Beijing simmered, China’s Dada grocery delivery platform went public on the Nasdaq last week.

For its part, the Chinese government wanted to keep its best listed companies closer to home. Last year, the STAR market was launched in Shanghai just months after a directive from Chinese President Xi Jinping.

“The Shanghai STAR market has also reduced the costs of the IPO in China, removing one of the main reasons why many Chinese companies go public in Hong Kong or abroad,” said in an email. Jay Ritter, professor of finance at the University of Florida. . He said Chinese companies had to wait a long time for approval from the Chinese Securities Regulatory Commission.

The number of public offerings in China reflects regulatory changes.

  • In 2018, 105 companies listed on the Chinese mainland A equity markets, up from 438 the year before, according to data from Wind.
  • When the STAR market was launched last year, it attracted 70 of the 203 companies that went public, according to the data.
  • For this year until Tuesday, 39 of 106 public offerings were on the STAR market, according to Wind.

The number of public offerings in Hong Kong has also increased in recent years, exceeding 160 last year and 55 for the year so far, according to Wind.

The semi-autonomous region has made it easier for biotechnology companies to register in recent years. The Hong Kong Stock Exchange is already home to Chinese tech giants such as Tencent and Meituan-Dianping.

UBS Securities’ Chinese equity strategy team added in a note that the new secondary listings in Hong Kong may still attract investment from US institutional investors with global operations.

Foreign financial companies are increasing their interest

International financial institutions already have an eye on China. The Chinese government has stepped up efforts to further open the domestic financial industry to foreign players. These measures are part of a trend that has lasted for years and are also part of the Phase One trade agreement signed with the United States in January. Critics say Beijing made sure its own financial services industry was well developed before opening the market to foreigners.

But many companies point out that several segments of financial services are still in the early stages of development, such as insurance and asset management.

“We have seen great interest in the market,” said Chantal Grinderslev, partner at Shanghai-based investment management consultancy Z-Ben, in an email. “For customers who turn to China … they all realize: in today’s global environment, there is no alternative to China. ”

In one of the latest initiatives by a foreign company, Fidelity International – the now independent foreign arm of the US asset management giant – last month called for the creation of a mutual fund unit wholly owned. In 2018, the company launched a five-year partnership with Ant Fortune, a subsidiary of Al Financial, a subsidiary of Alibaba, to study Chinese retirement preparedness.

Scully Cui, director of Bain Greater China, said in a telephone interview earlier this week that more and more foreign companies are entering a Chinese market already full of agile players.

“Foreign financial institutions should (move) fast enough to make the most of this openness policy,” she said.

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