On December 16, 2020, President Trump passed the Holding Foreign Companies Accountability Act, which stipulates that companies listed in the U.S. must strictly comply with U.S. auditing standards. The rule ensures that all foreign companies listed and traded on U.S. exchanges must meet the same independent audit requirements as U.S. companies. If a U.S.-listed company fails to meet the review requirements of the Public Company Accounting Oversight Board (PCAOB) for three consecutive years, the securities of these U.S.-listed non-U.S. companies will be prohibited from trading in the U.S. and will be forced to delist from the U.S. stock market.
The predecessor of the Act dates back to the Sarbanes-Oxley Act of 2002. In the wake of the Enron and WorldCom collapses, the U.S. government overhauled oversight of public company audits and created the PCAOB, which requires oversight boards to periodically review companies' accounts. The requirement also applies to foreign companies listed in the United States. So far, more than 50 countries have signed agreements with the United States to allow PCAOB audits. But China has refused to sign agreements to comply with these examination audit rules for more than a decade. Chinese and US regulators have held talks on the issue in the past many times, but the Chinese side has refused to sign the deal, citing secrecy laws.
Relations between the two countries have been increasingly strained over the past few years since Trump took office because of his political interests, and an accounting fraud scandal this year at Luckin Coffee Inc., a Chinese company listed in the U.S., has prompted the Trump administration to speed up passing of the bill. Although the bill is ostensibly concerned only with the disclosure, transparency and accountability of listed companies to protect the interests of investors and market order, it is not hard to imagine a series of measures aimed at China, politicizing the so-called regulation.
Now, with over 200 Chinese companies listed in the U.S. and traded through ADRs, of which technology companies account for half of the total market capitalization of over $1 trillion. Will the passage of the bill affect the avenue of Chinese companies raising capital overseas, or will U.S. investors lose the opportunity to invest in this fast-growing Chinese market?
Hong Kong's Securities and Futures Commission's early restrictions on listing structures with weighted voting right led many Chinese tech companies and start-ups to list in the U.S.. With the revision and optimization of Hong Kong's listing rules in recent years, many mainland enterprises have chosen Hong Kong as their first choice for capital raising and listing. The current “confidence crisis” in Chinese stocks, and the increasing cost and difficulty of Chinese IPOs in the U.S. have led some companies in the new and innovative industries, or biotechnology companies that are not yet generating profits, to consider Hong Kong as their first choice for listing.
Many Chinese companies listed in the U.S. worry that their shares will have lower liquidity and valuations if they do not list in the U.S. Yet with Hong Kong being the world's third largest stock exchange and capital raising center, and its well-developed legal system, valuation and liquidity may no longer be an obstacle for these companies. If Chinese companies listed in the United States cannot meet the listing requirements of the United States due to the implementation of the Act, they are forced to leave, coupled with the uncertain relationship between the U.S. and China, the U.S. may use the Act to increase restrictions on US-listed Chinese companies, which will affect Chinese companies wishing to say in the U.S.As one of the world's most important financial centers, Hong Kong is the natural choice for these companies to return to the market as long as they meet the requirements for listing in Hong Kong. Some of the technology giants that currently have secondary listing status in Hong Kong, such as Alibaba and Jingdong, would also benefit from Hong Kong as a primary listing market for these giants if they choose to leave the U.S. altogether and list in Hong Kong, as there is a high probability that these companies will be included in the Hong Kong Stock Exchange list, attracting domestic investors to invest in these high-growth technology companies. Some people think that if Chinese companies do not list in the U.S., it will weaken their ability to raise capital in the international market, but I do not share the same view; on the contrary, these companies will actually have more advantages if they list in Hong Kong than in the U.S.
If Chinese companies exit the U.S. and list in Hong Kong instead, it will have little impact on U.S. institutional investors or fund managers investing in those companies. U.S. retail investors who want exposure to these high-growth Chinese companies can also get access to Hong Kong-listed Chinese companies by opening global accounts with major U.S. brokerage firms or by investing in exchange-traded funds and mutual funds.
While there are still many Chinese companies listed in the U.S. that have not yet decided whether to stay or move to Hong Kong, including the trending electric car stocks in the U.S. right now, such as NIO, LI and XPEV, if they choose to list in Hong Kong, I believe their valuations and popularity will be no less than U.S. companies of similar nature. This is because many domestic investors are more willing to pay higher valuations for Hong Kong-listed companies, especially Chinese high-tech companies, than their U.S.-listed counterparts.
Mr. Bernard Ling
Chief Strategy Director OF Amber Hill Group
Mr. Ling has held a number of key positions with international organizations including AB Insurance, AIA Group, Hong Kong Exchanges and Clearing Market, Genting Hong Kong Limited, Fidelity Investments Group, Credit Suisse AG and BNP Paribas.
Amber Hill Group is a fast-growing global investment firm dedicated to providing personal financial planning to high net worth clients around the world. The core quantitative trading systems created by the Group have performed well, and the assets under management of the Group's subsidiaries and affiliated companies exceed US $1,000,000,000.
