The House of Representatives on Wednesday unanimously passed a bill that sets the stage for delisting Chinese companies such as Alibaba Group Holding and JD.com from U.S. exchanges if they don’t comply with U.S. audit oversight rules within a three-year window. Of the China-related measures introduced in recent months, the bill could have the broadest impact on investors’ portfolios—though the logistics to implement the measures likely means the fallout won’t be sudden or as drastic as it may sound.
With the House vote, the Holding Foreign Companies Accountable Act bill goes to President Donald Trump, who is expected to sign the measure. The Senate already passed the bill over the summer, and the Securities and Exchange Commission is seeking comment on a similar delisting proposal this month.
KraneShares CSI China Internet ETF
(ticker: KWEB), which has several U.S.-listed Chinese stocks among its top holdings, fell 0.51% after hours to $73.80. Shares of
(JD), which closed down 1% at $84.38, and
(BABA), which closed down 1% at $261.32, slipped further in after-hours trading.
The delisting push comes amid a spate of measures aimed at China as the relationship between the two countries undergoes a reset. But this bill addresses longstanding issues around disclosures, transparency and accountability, including limitations on foreign oversight of its companies.
Investors are grappling with the increased regulatory and geopolitical risks at the same time strategists are recommending they allocate more to China as its economy is further along its recovery from the pandemic. The
iShares MSCI China
exchange-traded fund (MCHI) is up almost double the
index year-to-date, and 36 Chinese companies have gone public this year in the U.S., according to Renaissance Capital, up from 25 a year earlier. Taking a selective approach and factoring in risks may increasingly be the answer rather than dumping all things China.
The bill won’t come as a surprise to investors. Emerging markets fund managers have been swapping U.S. listings of widely held stocks like
Alibaba Group Holding
(NTES) for their secondary listings in Hong Kong listings for months, in anticipation of the measure. And some of the highest-valued Chinese companies have sought secondary listings, with 30 of the roughly 190 U.S. listed Chinese companies having that as a safety net.
Retail investors can also access those listings. For example, Interactive Brokers offers access to 135 markets, including Hong Kong, and allows trade in 23 currencies; Fidelity offers its investors direct access to 25 foreign markets, including Hong Kong, with settlement in 16 currencies. Schwab clients that want to trade on local markets like Hong Kong in the local currency directly can do so through a global account.
But more than 100 companies still don’t have another listing yet, including popular electric vehicle stocks like
(XPEV). Here, one framework may be to think about Brexit. “If you convinced yourself Brexit was happening tomorrow and you better act, you would have been premature by two to three years,” says Patrick Chovanec, economic advisor at Silvercrest Asset Management. “I’ve always argued that a lot of these companies don’t belong on U.S. exchanges but that doesn’t mean you pull the rug out. The three-year time horizon creates a framework for the U.S. and China to negotiate. They will have three years to develop an off-ramp for companies that can’t meet compliance.”
Another reason few expect immediate selling: Investors are likely to monitor whether the new administration has better luck at seeking a compromise with China over auditing—though most analysts assign a low probability to such a truce.
Chinese companies would have to meet listing requirements closer to home, which range from criteria regarding revenue, market cap, float and management continuity, but they may find a more hospitable backdrop. The Hong Kong stock exchange has already amended rules to make more companies eligible to list there and mainland Chinese exchanges, including the Nasdaq-like STAR board in Shanghai, are also making to changes to make the domestic market more attractive to Chinese tech companies, says Wechang Ma, portfolio manager at global investment manager NinetyOne, which oversees more than $140 billion in assets, via email.
If companies that currently have secondary listings in Hong Kong leave…