Traders work on the floor of the NYSE in New York.
NYSE
BEIJING – For Americans who want to play China’s growth story, investing in the country’s US stocks now carries a political risk that could lead to delisting.
That means that a Chinese company trading on a stock exchange like the Nasdaq will lose access to a wide pool of buyers, sellers and intermediaries. The centralization of these different market participants helps create so-called liquidity, which allows investors to quickly convert their holdings into cash.
The development of the US stock market over the decades also means that companies listed on established stock exchanges are part of a system of regulation and institutional operations that can provide certain investor protection.
Once a stock is delisted, the company’s stock can continue to trade through a process known as “over-the-counter”. But that means the stocks are out of the system – from large financial institutions, deep liquidity, and the ability for sellers to quickly find a buyer 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 give up sooner or later (a stock to be delisted soon), so place your bet now,” he said. “Better sell now, or wait for some bounce?”
The New York Stock Exchange announced last week that it would be dropping three Chinese telecommunications giants named in President Donald Trump’s executive order banning US investments in companies with alleged ties to the Chinese military.
Assuming trades would be settled through a third-party system on Jan. 7-8, the exchange said it would suspend local trading of China Mobile, China Unicom and China Telecom shares before the market opens Jan. 11.
Shares of the three companies fell in New York trading on Monday. Trading volume for the day approached that of the whole of last month, according to data from Wind Information.
But Hong Kong-traded shares of the companies rose during Tuesday’s session after the New York Stock Exchange reversed its delisting decision, citing additional talks with regulators about the executive order.
Trump’s executive order gives US investors until Nov. 11 to sell or sell the affected companies. Most of the companies mentioned, if publicly traded, are not listed in the US.
Tensions between the US and China have escalated under the Trump administration. A dispute that focused on trade just over two years ago has since spilled over to technology and finance.
It is unclear how US President-elect Joe Biden will handle the financial flows between the two countries. Analysts expect his administration to rally traditional US allies to work together to put more pressure on Beijing to address protracted complaints about the country’s unfair trade practices.
De-listing is not the end
Chinese stocks have been delisted from the US stock markets for reasons other than politics.
About a decade ago, regulatory action against accounting fraud led to a slew of removals. Other Chinese companies chose to return to their home market, where they could potentially raise more money from investors more familiar with their business.
Last summer, Chinese coffee chain operator Luckin Coffee was dropped from the Nasdaq after the company revealed manufacturing revenues of 2.2 billion yuan ($ 340 million). The stock hit a 52-week low of 95 cents per share.
But shares rose even after going “over-the-counter”, closing at $ 8.64 each on Monday.
Most of the Chinese start-ups that have been listed on a stock exchange in New York in recent years are consumer-oriented technology companies.
Chinese companies remain enthusiastic about the New York market for its prestige, while international investors are still buying. China-based companies raised $ 11.7 billion through 30 US IPOs last year, the most capital since 2014, according to Renaissance Capital.
The company’s analysis found that the Chinese companies that raised at least $ 100 million in 2020 had an average total return of 81%.