Chinese companies with shares traded on American stock exchanges are facing significant challenges from political leaders in both Washington and Beijing.

New regulations in both countries will make it much harder for other companies to follow in their footsteps, restricting access to billions of the dollars in funding that helped grow internet retail giant Alibaba, the online gaming firm Tencent, the ride-hailing service Didi, and until recently China Telecom.

In Beijing, regulators have signaled that they plan to scrutinize domestic firms that want to list their shares abroad, particularly when those businesses collect data on Chinese consumers. Experts say this is causing many Chinese firms to reconsider plans to sell their shares on exchanges outside of China.

At the same time, the Biden administration is moving forward with plans to implement a 2020 law that would force foreign companies to de-list from U.S. exchanges unless U.S. regulators are allowed to verify their financial audits at least once every three years — something the Chinese government has been highly reluctant to allow.

Many of these major, high profile Chinese companies that have straddled markets and funding sources in the U.S. and China are suddenly caught in a tug-of-war between western capital markets that require financial transparency from public companies and a Chinese government that jealously guards sensitive information.

How this tension gets resolved will determine whether or not Chinese firms have open access to the deepest and most liquid source of investment capital in the world — the U.S. stock markets. It will also determine how much transparency investors can expect from the Chinese companies that are playing an ever-larger role in the world economy.

Major funding source

It’s hard to overstate Chinese companies’ reliance on U.S. capital markets for funding.

In the first six months of 2021 alone, 34 Chinese firms began listing their shares on U.S. exchanges, raising some $12.4 billion in capital and generating hundreds of millions of dollars in fees for Wall Street investment banks. Another 20 companies have initial public offerings (IPOs) scheduled for later this year.

According to the U.S.-China Economic and Security Review Commission, as of May 5 this year, there were 248 Chinese companies listed on U.S. exchanges, with a combined market capitalization of $2.1 trillion.

Bumpy ride for Didi

Early this month, one of those firms, the ride-hailing company Didi, saw its share values plunge after Chinese regulators forced it to remove its app from Chinese markets, citing violations of data use and collection rules.  

In announcing an investigation into Didi, Chinese authorities were vague about what the company’s supposed violations were, but said that the move was part of a broader effort to “consolidate the information security responsibilities of overseas listed companies.”

The Chinese company ByteDance, which owns the hugely popular short-form video app TikTok, earlier this year announced that it would delay its planned IPO in New York. The announcement came after a meeting with Chinese government officials, with the company citing unspecified data security problems.

The result of these government investigations, experts say, has been to make Chinese firms reconsider pursuing an initial public offering in the U.S. or other foreign markets.

Bolstering domestic exchanges

At the same time that it is applying new scrutiny to Chinese firms that list abroad, the Chinese government has been making efforts to show domestic firms that Chinese exchanges are a viable option for raising capital.

After then-president Donald Trump forced China Telecom to de-list its shares in the U.S. early this year, the firm is turning to Chinese exchanges. Last week Chinese regulators agreed to a plan for the company to offer $8.4 billion in shares to the public on the Shanghai stock exchange, the largest share offering on mainland China in more than a decade.

While some worry that the Chinese government is taking early steps to prevent domestic firms from selling their shares on foreign exchanges, others believe Beijing’s aim is not so clear.

China’s aims may be limited

“I think it would be premature to assume that the goal is to prevent listings of any kind by these companies in foreign markets,” said Nicholas R. Lardy, a senior fellow with the Peterson Institute for International Economics. “If that was the goal, the securities regulator could have just refused to approve any of the listings that were in the pipeline.”

In an interview with Bloomberg News last Friday, Paul Triolo, a senior leader with the Eurasia Group also said that he believes Beijing’s strategy is more limited.

It’s not clear that Beijing’s strategy is, for example, to force companies to all list in Hong Kong or on the mainland here, because I don’t think that’s really realistic in the short term,” he said. 

“I think Beijing is trying to thread the needle here,” he added. “They’re trying to get their companies to agree to go through these regulatory hurdles before they list so they can gain some control over this. But they’re still, I think, grappling with the long-term issue of are they going to come to agreement with the U.S. over this auditing issue, because ultimately, that’s going to be a really huge factor in whether Chinese companies are going to continue to go and do IPOs on the U.S. market.”

Complications of transparency

The friction over the U.S. demand that Chinese public companies submit to financial audits arises from the inherent differences between Chinese companies and firms in most other major developed countries. 

In the U.S., for example, public companies tend to have an arm’s-length relationship with the federal government, which means that when investors demand detailed information about their operations and finances, the government’s security interests are not implicated.

In China, however, major companies are often closely intertwined with the government or the armed forces, making demands for Western-style transparency far more complicated.

‘An inflection point’

Experts say there is little question that there will be at least some level of disconnection between Chinese companies and U.S. markets.

“Some decoupling is underway and seems inevitable,” said Doug Barry, a spokesperson for the U.S.-China Business Council. “The whole relationship is at an inflection point.”

“To avoid a major split, China in particular will have to change course in ways that at the moment seem very unlikely,” Barry said. “Our companies that are in China report continued good earnings from their operations there but are increasingly concerned about the future because of the deteriorating bilateral relationship. New investments will be reduced until the outlook becomes clearer.”

Like others, Barry holds out hope for a solution that might prevent major damage. He said that the Phase One trade deal negotiated by the Trump administration might be a means of achieving some kind of balance.

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