As the trade war between the United States and China continues, Chinese companies listed on U.S. stock exchanges, known as Chinese concept stocks, are also facing the risk of delisting in addition to tariffs.
Currently, there are 286 Chinese companies listed on U.S. exchanges with a total market value of around $1.1 trillion, which has increased compared to last year. However, with comments from U.S. Treasury Secretary Scott Bessent in April, market sentiment about the future of Chinese companies listing in the U.S. has become uncertain.
Firstly, the Chinese Communist authorities often use private enterprises as tools to infiltrate the United States, and some Chinese companies may secretly support the CCP’s military and intelligence activities.
In February this year, former President Donald Trump designated Communist China as a foreign adversary and stated that the U.S. prioritizes investment policies to prevent U.S. funds from being used to develop Chinese companies and to thwart Beijing’s civil-military fusion strategy.
Furthermore, many Chinese companies listed in the U.S. do not comply with auditing regulations. In 2020, Luckin Coffee was exposed for fabricating over $300 million in sales and was forced to delist from the NASDAQ and fined $180 million by the U.S. Securities and Exchange Commission. This major scandal severely impacted investors such as BlackRock and Singapore’s Government Investment Corporation (GIC) who invested in Luckin.
At the end of 2020, the U.S. passed the Holding Foreign Companies Accountable Act, requiring Chinese companies to provide accounting information to U.S. regulatory agencies for inspection. Under the Act, the U.S. government can delist and prohibit trading for companies that do not comply with regulatory requirements for three consecutive years.
Moreover, many Chinese companies use the Variable Interest Entity (VIE) structure to indirectly list in the U.S. The Trump administration promised to review the ownership structure of Chinese companies listed in the U.S.
The VIE structure involves Chinese companies first establishing a shell company in an offshore jurisdiction, such as the Cayman Islands, to register for listing in the U.S., separate from their operations in China. Through complex contractual relationships, the shell company has the right to claim the profits of the original company, making the original company a “variable interest entity” of the listed shell company.
However, when U.S. shareholders buy stocks of Chinese companies, they are essentially purchasing shares of the shell company. This means they cannot actually own equity in the Chinese companies, unlike typical U.S. listed companies.
According to data from the U.S.-China Economic and Security Review Commission, as of early March, over half of the 286 Chinese companies listed on U.S. exchanges used the VIE structure.
The U.S. Securities and Exchange Commission can order exchanges to delist companies from China or Hong Kong. The SEC also has the authority to further revoke a company’s trading registration, prohibiting them from engaging in off-exchange trading.
Over-the-counter trading, also known as OTC markets, refers to trading conducted outside of exchanges. Companies like Luckin Coffee and Didi Global Inc., despite leaving major exchanges due to accounting scandals, continue to trade over-the-counter.
The SEC can also use emergency powers to halt trading. If President Trump declares a state of emergency through executive order, the severity of these measures may increase. Another option is for the Trump administration to request the SEC to prohibit companies from using the VIE structure for listing.
These options could potentially lead to Chinese companies being delisted faster than the Holding Foreign Companies Accountable Act.
On May 2nd, two prominent Republican lawmakers wrote to SEC Chairman Paul Atkins urging the agency to take action against 25 Chinese companies listed on U.S. exchanges. These lawmakers believe that companies like Alibaba, Baidu, and JD.com have connections to the CCP military, posing “unacceptable risks” to investors.
There is currently no specific timetable for delisting Chinese concept stocks. According to analysts at Goldman Sachs, if U.S. investors are prohibited from investing in Chinese companies, they may sell over $800 billion in assets, including around $250 billion in American Depositary Receipts held by U.S. financial institutions, approximately $522 billion in Hong Kong stocks, and 0.5% of mainland Chinese stocks.
(Adapted from a report by Bloomberg)