Should ETF Investors Be Worried About The Delisting Of Chinese Equities?

On December 2, 2020, the House of Representatives voted to pass the Holding Foreign Companies Accountable Act, which passed the Senate in May. President Trump is expected to sign it into law. 

Back in August, I broke down six reasons why I believe the impact of Chinese equities delisting is insignificant and secondary to the fundamental earnings factors that drive the performance of Chinese equities. The risk to Chinese equities from delisting—particularly the non-state-owned segment—is minimal. 

The competitive landscape between of the U.S. and China still exists. The U.S.’s market efficiency, work ethic, freedom of speech and well-tested legal system is still a formidable advantage and attraction to foreign companies. But whether, and how, this issue  is resolved is a good signal to watch regarding U.S.-China economic dynamics over the next four years. 

To answer my question from the title, in short: no. Here are a few things to keep in mind around these recent announcements.

1. The Bill Provides a Three-Year Window for U.S.-China Negotiations.

The bill gives companies three years to become compliant. This is crucial, because in absence of a U.S.-China compromise, the natural home for delisted companies such as Alibaba Group Holding and Baidu is the Hong Kong Stock Exchange (HKSE), which has actively courted them to dual-list their shares. 

Larger companies such as Alibaba, JD.com and NetEase have already finished dual-listing in Hong Kong and New York, and several other companies are preparing to do the same. HKSE has relaxed its rules to allow companies such as Alibaba and JD.com to dual-list, but it still has more stringent listing rules than U.S.-based exchanges. 

Listing on HKSE requires a minimum market cap of HK$40 billion ($5.16 billion), or HK$10 billion ($1.29 billion) with revenue of more than HK$1 billion ($130 million). 

There are about 150 small Chinese companies that could potentially be forced to delist from the U.S. that may not be able to list in HKSE. Within the WisdomTree China ex-State-Owned Enterprises Index, which targets more large- and mid-cap Chinese companies, the smallest company has a market cap of about U.S. $1.5 billion as of now. In the worst-case scenario of all Chinese companies delisting from U.S. exchanges, less than 1% of the Index weight could potentially fall into this category. 

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