Giant Chinese companies delisting from U.S. exchanges signals the end of an era
Dexter Tiff Robers began reporting on Chinese companies in the 1990s as they first emerged on the world stage and began raising money on Wall Street. But now, as five more SOEs announce NYSE delistings, he thinks China’s corporate giants seem to be departing the U.S. for good.
It’s the end of an era.
Some two decades after listing their shares in the U.S., a move heralded at the time as signaling China’s desire for its economy and companies to become global, five of the country’s largest state-owned enterprises (SOEs) including PetroChina, Sinopec, Aluminum Corporation of China (Chalco), and China Life Insurance, have all announced they will delist from the New York Stock Exchange.
The concerted nature of the move — the companies all made the announcement on August 12 — strongly suggests Beijing signed off on or even ordered them to delist. And it hardly happened in a vacuum. The U.S. and China have been sparring for over a decade now over whether U.S.-listed Chinese companies will open up their books to auditors approved by the Securities Exchange Commission (SEC). None of the companies mentioned the audit dispute directly, though PetroChina noted the “considerable administrative burden for performing the disclosure obligations.” But the auditing requirements were clearly the impetus for the joint move.
The dispute took on a new urgency after Washington passed the Holding Foreign Companies Accountable Act (HFCAA) in late 2020, and then finalized the Act’s rules in December of last year. They mandate that companies that don’t open their books will have trading in their stocks prohibited, potentially affecting 273 Chinese companies including Alibaba, JD.com, Baidu Inc. as well as the five SOEs. And of course it affects American investors: In March, Goldman Sachs estimated that American institutional investors hold Chinese company American Depositary Receipts (or ADRs) worth $200 billion worth of . (China Mobile, China Telecom, and China Unicom were already delisted last year following an earlier Trump administration decision aimed at denying finance to Chinese technology companies.)
Optimists are saying that the delisting of the SOEs clears the way for a deal. They argue that Beijing was never willing to allow American auditors to inspect the inner financial workings of its most important state enterprises, particularly those operating in areas with possible national security implications, like the oil and gas industry. They point to the fact that the delisting SOEs weren’t traded much on U.S. exchanges, making their departure unsurprising. (In its statement, PetroChina pointedly said it had never done any follow-on financing from its U.S. listing, and that Shanghai and Hong Kong exchanges could meet its needs.) And they note that the stocks of China’s private companies with U.S. listings, by contrast, are much more active, making their departure potentially more painful. Finally they believe that for non-state firms, China’s regulators won’t object to more transparency.
“I think Beijing regards large SOEs as simply too sensitive to be subject to audit inspections. Hence, the delisting announcements by PetroChina et al don’t signal much about prospects for a broader deal on audits,” tweeted Michael Hirson of the Eurasia Group.
Why the optimists are wrong
I’m wagering the optimists will be wrong. First off, recent actions by private companies don’t point in the right direction. China’s ecommerce giant Alibaba, recently named by the SEC as a company of concern, announced in July it will pursue a dual primary listing in Hong Kong, paving the way for Mainland investors to buy its stock through the Southbound Connect scheme. Alibaba has said it aims to keep its New York listing, but it remains to be seen whether the company really means that — or if it is even possible.
The real reason to doubt the possibility of a breakthrough deal, however, is politics. As the bilateral relationship continues to spiral downward, it seems increasingly unlikely that either Beijing or Washington will want to compromise on the auditing impasse. In a recent interview with Bloomberg, Erica Williams, Chair of the SEC’s Public Company Accounting Board, struck a decidedly tough stance, suggesting the rules could be retrospective, forcing companies to undergo auditing even after they have left U.S. exchanges.
“If a firm or issuer decides to delist this year, it really doesn’t matter to me because I need to know if you engaged in fraud last year,” Williams said on August 2. And with Beijing still expressing deep anger over House Speaker Nancy Pelosi’s recent visit to Taiwan, conciliatory moves on China’s part also seem unlikely.
In 2000, when PetroChina was preparing to list in the U.S., it was heralded as a sign of China wanting to learn from the West and move decisively towards a market economy. The “army of advisers” brought in to help PetroChina’s massive parent company, China National Petroleum Corporation (CNPC) included investment bankers from Goldman Sachs, 50 McKinsey & Co consultants, and 700 PricewaterhouseCoopers auditors. “If management can turn around this behemoth…it will provide an important blueprint for overhauling state enterprises. And it could mark the emergence of China’s new corporate giants on the world scene,” we wrote in Businessweek at the time.
Well now, China’s corporate giants may be departing for good.
