China warning on Trump's delisting threats, while companies rethink US IPOs


  • Markets
  • Tuesday, 01 Oct 2019

While a U.S. Treasury official has said Trump's administration was not considering blocking Chinese companies from U.S. listings "at this time", the possibility it may do so has resulted in much handwringing by mainland firms that had been looking at a U.S. IPO. "Too many calls. Every client is worried," said Terence Lin, CEO of World Financial Holding Group, a boutique investment bank which helps Chinese companies with Nasdaq listings.

SHANGHAI: Bestbond, a Chinese apartment rental company, had been planning on a Nasdaq flotation in one to two years but as U.S.-China trade tensions racheted higher, the Hong Kong stock exchange emerged as a possible candidate. Now, it's firmly on the table.

"We're having second thoughts," CFO Wang Jia told Reuters, adding that Hong Kong, despite being beset with political unrest, had become more attractive after news emerged on Friday that U.S. President Donald Trump's administration was looking at delisting Chinese companies from U.S. bourses.

Bestbond, based in Nanjing, eastern China, still prefers Nasdaq as it is a higher profile, more liquid market that would likely offer better valuations, but the company cannot afford to have its eggs in just one basket, Wang said.

While a U.S. Treasury official has said Trump's administration was not considering blocking Chinese companies from U.S. listings "at this time", the possibility it may do so has resulted in much handwringing by mainland firms that had been looking at a U.S. IPO.

"Too many calls. Every client is worried," said Terence Lin, CEO of World Financial Holding Group, a boutique investment bank which helps Chinese companies with Nasdaq listings.

Two sources said the U.S. move was part of a broader idea to limit U.S. investment in Chinese firms, while one source has said that it is motivated by security concerns.

Lin believes, however, that Trump's threat would be extremely difficult to implement legally and is merely a negotiation tactic in the rapidly escalating trade war between the world's two biggest economies.

Even if difficult to execute, Trump's threats are bound to hurt Chinese firms already listed in the United States as well as providing bourses such as the Hong Kong and London stock exchanges with a fresh and lucrative opportunity to woo Chinese firms, industry participants said.

"The political uncertainty could exert pressure on the valuations and the liquidity of U.S.-listed Chinese stocks for a long long time," said Frederick Shen, partner at Chinese venture capital firm New Vision Capital.

Shen said he's increasingly taking his portfolio tech startups to list on China's newly launched STAR Market instead of the Nasdaq.

According to regulatory filings, corporate executives and bankers, Nasdaq Inc is cracking down on IPOs of small Chinese companies by tightening restrictions and slowing down their approval.

A Nasdaq spokeswoman said the bourse provides non-discriminatory and fair access to all eligible companies, but declined to comment on the impact of the listing rule changes for small Chinese companies.

CORNERSTONE WOES

For some firms, Trump's threats have even greater implications.

Cornerstone, a Chinese boutique private equity fund manager, had been hoping for an IPO on the New York Stock Exchange in October but now sees an imminent U.S. listing as challenging, according to people familiar with management's thinking.

The Guangzhou, southern China-based asset manager focuses on investing in Chinese firms that have listed or are seeking to list in the United States, making its business model particularly vulnerable to slumps in those valuations.

The Nasdaq Golden Dragon China Index <.HXC>, a gauge that tracks Nasdaq-listed Chinese firms, slumped more than 4% on Friday.

The sources declined to be identified because of the sensitivity of the issue.

Marcum Bernstein & Pinchuk, a firm that advises Chinese companies on their capital markets strategies, said making equity capital raising a new flashpoint in the war between China and the United States benefits nobody.

"Having just returned from a week in China and given the work we do with pre-IPO Chinese companies, it's clear there is a mutual interest among the business community to continue to conduct business," said Drew Bernstein, co-managing partner.

He said China had produced more than 180 of the 300 unicorns worldwide and had generated hundreds of millions of dollars in fees for U.S. bankers and advisors.

"The U.S. offers the most diversified capital in the world and China offers innovative companies and a massive consumer and investor base, to name a few benefits."

Meanwhile

China warned on Monday of instability in international markets from any "decoupling" of China and the United States, after sources said the Trump administration was considering delisting Chinese companies from U.S. stock exchanges.

The move would be part of a broader effort to limit U.S. investment in Chinese companies, two sources briefed on the matter told Reuters last week, in what would be a radical escalation of U.S.-China trade tensions. The news had earlier been reported by Bloomberg..

A third source said the delisting idea was motivated by growing security concerns within the administration of U.S. President Donald Trump over Chinese companies' activities.

White House trade adviser Peter Navarro on Monday dismissed the reports as "fake news."

"That story, which appeared in Bloomberg: I've read it far more carefully than it was written," Navarro told CNBC. "Over half of it was highly inaccurate or simply flat-out false."

Shares of U.S.-listed Chinese stocks reversed direction on Monday after a sharp fall on the delisting reports. Alibaba Group Holding Ltd and JD.Com Inc rose 2% each in early trading after tumbling more than 5% on Friday.

Also on Monday, e-learning firm Youdao Inc became the latest Chinese company to file for an initial public offering in the United States. Chinese online pharmacy Ecmoho filed to list its shares on the Nasdaq last week.

Ecmoho is planning to start pre-marketing next week, IFR reported, citing people familiar with the matter. The company was not immediately available for comment.

Earlier in the day, stocks in China fell to their lowest in almost a month on the reports, which came at a sensitive time ahead of celebrations on Tuesday to mark 70 years since the founding of the People's Republic of China.

Chinese Foreign Ministry spokesman Geng Shuang told a daily news briefing on Monday he had noted the response from the U.S. Treasury, which said there were no plans to block Chinese listings "at this time".

"Exerting maximum pressure and even seeking the forced decoupling of China-U.S. relations will harm the interests of Chinese and American companies and people, create turmoil in financial markets, and endanger global trade and economic growth," Geng added.

"This does not accord with the interests of the international community."

Geng said he hoped that the United States would take a "constructive attitude" toward resolving differences.

The United States and China have been locked in an escalating trade war for nearly 15 months. They have levied punitive duties on hundreds of billions of dollars of each other's goods, roiling financial markets and threatening global growth.

In June, U.S. lawmakers from both parties introduced a bill to force Chinese companies listed on American stock exchanges to submit to regulatory oversight, including providing access to audits, or face delisting.

Chinese authorities have long been reluctant to let overseas regulators inspect local accounting firms - including member firms of the Big Four international accounting networks - citing national security concerns.

China and the United States are due to resume high-level trade talks next week in Washington.

In advance of the talks, Chinese firms bought up to 600,000 tonnes of U.S. soybeans for shipment from November to January on Monday, two sources with knowledge of the deals said. The purchases form part of a tariff-free quota allotted for up to 2 million tonnes this week. China has frequently made goodwill purchases of U.S. agricultural goods ahead of trade talks.

China hopes Beijing and Washington will resolve their trade dispute "with a calm and rational attitude", Vice Commerce Minister Wang Shouwen, who has been part of China's negotiating team, said on Sunday.- Reuters


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