Pang Ming is head of macro and strategic research at China Renaissance Securities HK Ltd.
On Wednesday, the U.S. House of Representatives passed legislation that would ban any company from being listed on any American securities exchange if the U.S. auditing regulator is unable to view its audits for three years in a row. This is the latest move by the U.S. to increase financial scrutiny of Chinese companies amid a longstanding dispute over American regulators’ access to audits of U.S.-listed Chinese firms.
This followed the Senate approving the bill in May and U.S. President Donald Trump is widely expected to sign it into law, indicating a bipartisan consensus to exert more pressure on Beijing.
Meanwhile, China is stepping up efforts to attract Chinese companies to go public at home, such as by launching Shanghai’s Nasdaq-style STAR Market and registration-based IPO reform.
Read more In Depth: Why Chinese Companies May Get Booted From U.S. Stock Markets
However, a company’s listing choices reflect its long-term, strategic and commercial consideration, and will not be totally changed due to risks from regulatory rules. In the first three quarters, 25 Chinese companies have gone public in the U.S., raising over $8 billion. That is up 134% from the total amount Chinese firms raised through IPOs in the country last year.
The U.S. still remains an attractive destination for IPOs, as its stock markets are relatively large and can provide considerable liquidity.
In addition, American stock markets are more mature than the Hong Kong and Chinese mainland ones, with more international and diversified investors who can better understand and accept valuations and business models of companies in new-economy industries.
By contrast, the Hong Kong Stock Exchange has been slower than expected to roll out reforms to attract more listings.
In late October, the bourse said it would need more time to decide whether to expand the current regime to allow corporate entities to benefit from weighted voting rights structures. Another change to its IPO regime to reduce the time between pricing and trading debuts will happen no earlier than the second quarter of 2022.
Despite mounting geopolitical tensions and regulatory uncertainty faced by Chinese companies listed overseas, China’s new-economy sectors will remain appealing to investors in the long term.
While investors are adjusting their equity portfolios to add exposure to industries benefitting from economic recovery and move out of sectors that did well during the Covid-19 outbreak, growth stocks in sectors such as technology, pharmaceuticals and consumption are expected to outperform value stocks.
In 2019, the added value of China’s economic activities with new industries, new business formats and new business models accounted for 16.3% of GDP, with the annual growth rate calculated at current prices reaching 9.3%.
In the long run, the technology and consumption sectors will maintain a high investment value, as China continues to rely on technology to promote economic transformation and stimulate domestic demand to keep stable economic growth.
This commentary has been edited for length and clarity.
Contact translator Luo Meihan (meihanluo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)
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