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

Even now that the delisting law is forecast to become official, Chinese companies continue to list in the U.S., showing the attractiveness of the U.S. financial and legal system. 

For example, Chinese dating app company BlueCity had its IPO in the U.S. in July. It gave investors renewed hope and confidence that this issue would be resolved. 

The dispute is now focused on who has the power to audit the auditors such as Ernst&Young-China, Public Company Accounting Oversight Board (PCAOB) or China’s equivalent organization.  

Before the trade war in 2017, China and the U.S. were already testing a potential solution that would allow both regulators to have authority. PCAOB did an audit test run in tandem with its Chinese equivalent, though was not entirely satisfied with the process. With a new administration in the U.S. in 2021, this issue is highly likely to achieve satisfactory compromises on both sides.

2. ETFs Are Impacted Differently Than Individual Stocks, and WisdomTree Is Already Trading HK shares Where Liquidity Is Sufficient

That brings us to the second point. If these companies already have dual listings by the time the law passes, investors in exchange-traded funds (ETFs) that seek to track indexes—such as the WisdomTree China ex-State-Owned Enterprises Index (CHXSOE)—wouldn’t even notice the impact on their portfolios. 

A swap of New York Stock Exchange (NYSE) shares for Hong Kong shares would most likely be treated as a corporate action, which portfolio managers deal with daily. For investors who directly own those stocks, it may be a bit more complicated, depending on how their brokerages handle corporate actions.

WisdomTree has already started trading the HK shares of dual-listed companies where liquidity is sufficient. For an ETF investor, this is already happening in the background. For individual investors, swapping the U.S. share for a Hong Kong share will be a taxable capital gains event in regular accounts. The tax advantage of the ETF structure shines through in events like this. 

3. The Role of the PCAOB

The history of the PCAOB is as much about regulatory power as protecting investors from fraud; it was created in response to the 2001 Enron scandal. Enron’s auditor is believed to have colluded with the company to manipulate and falsify its accounting records. 

The PCAOB is supposed to be the auditor’s auditor, regulating accounting companies such as Ernst &Young (EY) and PricewaterhouseCoopers (PwC). 

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