Despite a sharp deterioration in U.S.-China relations last year and a series of measures taken by Congress and the administration to restrict Chinese stock market trading in the United States, the latest data show that the size of financing by Chinese companies in the U.S. securities market has reached a multi-year high.
New York Stock Exchange
A University of Florida study shows that last year saw the most initial public offerings (IPOs) by Chinese companies in the U.S. stock market in a decade, with 32 Chinese companies raising a total of $12 billion, four times as much as the previous year. companies coming to the U.S. for the first Time in 2019 raised just $3 billion. As of last week, nine more Chinese companies have come to the U.S. for initial public offerings, raising $2 billion.
U.S. IPOs by Chinese companies reach record high
In addition, statistics from the Rhodium Group, a U.S.-based economic consulting firm, show that Chinese companies raised the most money in years by going public in the U.S. in 2020. While direct investment between the U.S. and China has been on a downward trend since 2016, the scale of stock market investment has been expanding year after year, Rhodium said in a report last month. Including initial incremental offerings and inventory offerings from existing shareholders, Chinese companies raised a total of $19 billion in the U.S. stock market last year, the most since Alibaba set a record for U.S. IPOs in 2014.
Jay Ritter, a finance professor who led the study at the University of Florida, said he was somewhat surprised by the rush of Chinese companies coming to the U.S. for IPOs. He told the Voice of America, “Despite all these discussions, including a bill in Congress to delist Chinese companies, Chinese companies continue to come to the United States. It was very active all last year and so far this year.”
In a report last month on Chinese companies listed in the U.S., the Rong Ding Group said the U.S. financial markets are critical for Chinese companies to raise capital, with U.S. investors holding up to $1.2 trillion in Chinese securities cumulatively at the end of 2020.
Gary Dvorchak, managing director of The Blueshirt Group Asia, a U.S. investment advisory firm, said a U.S. listing would allow Chinese companies to improve their credibility and company valuation. Speaking to Voice of America, Dvorchak, who advises Chinese companies in China on going public in the U.S., said, “For example, there is a large and knowledgeable investor community in the U.S. in the biotech sector, so biotech companies are likely to find investors in the U.S. market who understand their business and value the potential of their company.”
In 1985, Xi Jinping, then secretary of the Zhengding County Party Committee in Hebei Province, stayed at Deng Ge Li’s Home for two days and three nights during a visit to Iowa.
Mark Herbert, founder of the financial advisory firm Herbert’s Digest and a senior commentator for the stock market news network MarketWatch, said that in addition to raising a lot of money, there is little risk for Chinese companies to come to the United States and go public. What’s not to like?
He told the Voice of America, “Let’s say that after the first round of funding for a Chinese company to go public in the U.S., the political risk becomes real and they can’t go public in the future. They can just brush it off and go to other markets to raise money, and there’s no negative consequences for them right now. If someone gives money, I’ll reach out and take it even if I know it may not last forever.”
Risk vs. reward
On the other side of the coin, however, Chinese stocks can pose significant risks for investors in the United States.
The U.S. Securities and Exchange Commission (SEC) said on its official website that it warns against Chinese stocks that the commission has limited ability to require issuers in China to meet high-quality disclosure standards and that “disclosures by Chinese companies are likely to be incomplete or misleading, and investors are at significant risk in this regard.”
Against the backdrop of deteriorating U.S.-China relations in recent years, the U.S. last year introduced a series of measures to tighten regulations on the listing of Chinese companies in the U.S., to the point where Chinese companies risked being expelled from the U.S. stock market.
The Nasdaq-listed Chinese company RuiXing Coffee was delisted in June after a scandal involving falsified sales broke out last April. The scandal reignited the U.S. government’s concern over a key issue that has long been unresolved between the two countries, namely that Beijing does not allow U.S. regulators to audit U.S.-listed Chinese companies. A White House memo last June said China was benefiting from U.S. capital markets without complying with important investor protection provisions, undermining the transparency of U.S. regulations and posing significant risks to investors.
In response to the inability of the Public Company Accounting Oversight Board (PCAOB) to enforce inspections of Chinese companies, a subsequent Treasury Department report on protecting U.S. investors against significant risks to Chinese companies recommended raising the threshold for listing Chinese companies. The Treasury report said China’s obstruction of U.S. transparency laws poses a significant risk to U.S. investors.
The U.S. House and Senate also passed the Holding Foreign Companies Accountable Act with a high vote last year. The law provides that if U.S. regulators fail to examine the audited accounts of a foreign company listed in the United States for three consecutive years, the company will be delisted by the SEC. In addition, listed companies must disclose whether they are owned or controlled by a foreign government, including the Communist government of China.
George Calhoun, director of the quantitative finance program at Stevens Institute of Technology, said the Foreign Company Accountability Act gives the new U.S. administration three years of wiggle room, and how it is ultimately implemented depends on how the Biden administration interprets the law. “If you interpret this law very strictly, then almost all Chinese companies that are associated with the Chinese government could face is a very negative Perception,” he said in an interview with the Voice of America.
U.S.-China Economic and Security Review
A report by the committee (USCC) said that as of October 2020, there were 217 Chinese companies listed on the three major U.S. exchanges, namely the Nasdaq, the New York Stock Exchange and the American Stock Exchange, with a total market capitalization of $2.2 trillion.
Brendan Ahern, chief investment officer at investment advisory firm KraneShares, said this is an issue that involves more than $2 trillion at a time when the U.S. economy is still very fragile, and that a full delisting of Chinese stocks could spill over to U.S. investors.
He told the Voice of America that investing in Chinese companies carries risks but often pays off handsomely. If you ask investors which company you would buy 20 years back, everyone would probably say Amazon,” he said, citing Chinese online company NetEase as an example. But the return on buying NetEase is much higher than Amazon.
NetEase, which went public in the U.S. in June 2000, has actually performed twice as well as Amazon, with a cumulative reporting rate of 18,000% over 21 years, compared to Amazon’s 8,700% rise, he said.”
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