Traders work on the NYSE floor in New York.
NYSE
BEIJING – For Americans looking to play China’s growth story, investing in the country’s listed US stocks now involves a political risk that could lead to delisting.
This means that a Chinese company traded on a stock exchange like Nasdaq would lose access to a large pool of buyers, sellers and intermediaries. The centralization of these different market participants helps to create what is called liquidity, which in turn allows investors to quickly turn their investments into cash.
The development of the United States stock market over the decades also means that companies listed on established exchanges are part of a system of regulation and institutional operations that can offer certain protections to investors.
After a stock is removed from the list, the company’s shares can continue to be traded through a process known as “over-the-counter”. But that means the stock is out of the system – from big financial institutions, big liquidity and the sellers’ ability to find a buyer quickly without losing money.
“The most practical thing for a typical investor to worry about is price,” said James Early, CEO of investment research firm Stansberry China.
“You will probably have to fold (an action that will soon be removed from the list) sooner or later, so place your bet now,” he said. “Are you better off selling now or waiting for some kind of jump?”
The New York Stock Exchange announced last week that it would remove from the list three Chinese telecommunications giants named in President Donald Trump’s executive order banning U.S. investment in companies with alleged ties to China’s military.
Assuming that the trades would be settled through a third-party system on January 7 and 8, the exchange said it would suspend local trading of shares in China Mobile, China Unicom and China Telecom before the market opens on January 11.
The shares of the three companies fell on the New York floor on Monday. Turnover for the day approached the previous month, according to data from Wind Information.
But the shares of companies traded in Hong Kong rose during Tuesday’s session after the New York Stock Exchange reversed its decision to go public, citing additional talks with regulators about the executive order.
Trump’s executive order gives American investors until November 11 to divest or sell the affected holdings. Most named companies, if publicly traded, are not listed in the U.S.
Tensions between the U.S. and China have increased under the Trump administration. A dispute that focused on trade just over two years ago spread to technology and finance.
It is unclear how US President-elect Joe Biden will manage financial flows between the two countries. Analysts expect their government to bring together traditional US allies to work together to put more pressure on Beijing to address long-standing complaints about the country’s unfair trade practices.
De-listing is not the end
Chinese shares were withdrawn from US stock exchanges for reasons other than political.
About a decade ago, a regulatory crackdown on accounting fraud led to a series of removals. Other Chinese companies have chosen to return to their home market, where they could potentially raise more money from investors who were more familiar with their business.
Last summer, Chinese coffee chain operator Luckin Coffee was withdrawn from Nasdaq after the company revealed manufacturing 2.2 billion yuan ($ 340 million) in sales. The stock hit a 52-week low at 95 cents.
But the stock rose even after going “over the counter” and closed at $ 8.64 each on Monday.
Most Chinese start-ups listed in New York in recent years are consumer-oriented technology companies.
Chinese companies continue to seek prestige in the New York market, while global investors are still buying. China-based companies raised $ 11.7 billion through 30 initial public offerings in the U.S. last year, most of the capital since 2014, according to Renaissance Capital.
The company’s analysis found that in 2020, Chinese companies that raised at least $ 100 million had an average total return of 81%.