Plans to delist from the New York Stock Exchange months after its IPO have raised concerns about the future of other Chinese companies listed in the United States.
Hang Seng Technology Index
– which tracks Hong Kong-listed shares of China’s biggest tech companies – hitting an all-time low earlier this week.
(JD), which are listed in both Hong Kong and the United States, were among the biggest losers.
Analysts are divided on what will happen next for Alibaba, JD.com and other Chinese stocks listed in the United States. “The risk of possible delisting is real,” said Robin Zhu, an analyst at Bernstein. Barron. Needham analyst Vincent Yu disagrees: “On the side of the Chinese regulator, there is no intention to remove them from the list.
Massive radiation would be a chaotic and dramatic move. And like Barron previously reported, experts believe regulators could reach a compromise within the three-year window provided by the SEC rule that would prevent delisting. But worries and regulatory pressure are unlikely to go away anytime soon.
Here’s what investors should consider if they own these stocks.
What are ADRs and how do they work?
Investors in foreign companies listed in the United States own shares of a US Certificate of Deposit, or ADR. Here is how they work.
U.S. banks bundle shares of companies listed overseas into ADRs, which are issued as shares that can be traded on U.S. dollar exchanges. Foreign companies, in turn, gain access to American capital.
But in the case of a Chinese stock listed in the United States, investors own shares in an offshore holding company. These shell companies are called Variable Interest Entities, or VIEs, and are a corporate structure used by Chinese companies to bypass Beijing’s rules on foreign investment while continuing to exploit U.S. capital. The offshore company has a contractual relationship with the operating company, which means that the investors do not have a direct stake.
VIEs are under intense scrutiny in the United States and China. SEC Chairman Gary Gensler said earlier this year that he was concerned investors might not realize how these companies worked and pushed for more oversight and transparency. Based on recent reports from China, regulators in Beijing are also looking to crack down on VIEs, especially tech or data-hungry companies.
What happens to your actions when a business is written off?
If a Chinese company listed in the United States like Didi is delisted, there are essentially three possible outcomes for investors: a stock buyback, a stock transfer, or stock limbo.
In a buyout scenario, the Chinese company could buy back its shares from investors at a price agreed to by shareholders – effectively going private. If the company wishes to go public again, it will do so in a separate list like the one in Hong Kong.
In a share transfer scenario, investors would exchange their ADR for foreign shares of the Chinese company. In the case of Didi, which does not have a secondary listing, one would first have to launch a listing – in Hong Kong or Shanghai, for example – to establish both a home for its foreign stocks and a transfer mechanism. ADR.
If Didi does not repurchase shares, but goes off the listing and does not initiate another listing, the possibility of trading his shares would be in limbo. Investors would still own shares in the company, but they would not be able to trade their shares on regulated exchanges. They could sell their shares in over-the-counter markets – with limited liquidity – or hold them until a suitable listing was launched.
which has been blacklisted by the Trump administration because of its ties to the Chinese military, remains a caveat. The widely owned stock was forced to retire from the New York Stock Exchange, leaving many individual investors unable to complete trades or transfers with their US broker.
What choices do investors have?
Worried investors have a few options if they think they have stocks that might be delisted and want to stay ahead of the risk.
The first is to sell their stake in Chinese companies listed in the United States. If investors still want to own shares of Chinese companies, they can try to buy a stake in a foreign stock exchange through a brokerage house. However, this option is not available on all brokerage firms.
There are other options as well, including converting an ADR into equity. Explore these options at the links below:
• How to buy Chinese stocks now that US listed stocks have become risky
• How funds can help investors navigate China
Write to Jack Denton at [email protected]