China Petroleum & Chemical Corporation (Sinopec), the world’s largest oil and gas conglomerate, announced it will exit the London Stock Exchange (LSE) on Nov. 1. Sinopec’s exit from the UK financial market and return to Hong Kong is suspected to be an attempt by the Chinese Communist Party (CCP) to attract foreign capital with high-quality assets to promote the internationalization of the Chinese yuan and to strengthen Hong Kong’s financial position.
Sinopec announced on Oct. 3 that it had applied for the withdrawal of its American Depositary Shares (ADS) from the UK financial market effective from Nov. 1. Sinopec also said that if the depositary agreement is terminated, current holders of the depositary shares will be able to continue to hold the depositary shares until the date set in the depositary agreement, or they can choose to exchange the depositary shares for corresponding H shares, also known as Chinese state-owned enterprise shares, which are shares of companies incorporated in mainland China but traded on the Hong Kong Stock Exchange (HKEX). In early July, Chinese state media reported that Hong Kong continues to be the top choice for listing Chinese companies amid increasing uncertainty about their listings in the United States.
It is noteworthy that at the same time, more Chinese companies are raising capital in order to be listed in Switzerland after the first four Chinese companies were issued GDRs (Global depository receipts) in Switzerland in late July.
So why did Sinopec announce its delisting from the UK at a time when other Chinese companies were seeking to enter European markets?
IPOs at HKEX Declined for Nearly 10 Years
Mike Sun believes that Sinopec’s withdrawal from the UK financial market is an attempt by the CCP to introduce long-term investments based on high-quality assets and to keep the dividends in mainland China A-shares and Hong Kong H-shares, with the ultimate goal of internationalizing the Chinese yuan and consolidating Hong Kong’s status as an international financial center.The stock market is often viewed as a barometer for the economy. The HKEX saw a sharp decline in financing and total amount of IPOs in the first three quarters of this year, with the number of IPOs down 30.4 percent and the amount of financing down 79.3 percent by the end of August compared to the same period last year, according to the HKEX website.
Deloitte released its “Review and Outlook for the Third Quarter of 2022” on Sept. 7, which outlines the IPO market in Hong Kong for the first three quarters of 2022. The number of IPOs is slightly better than the lowest level in the same period of 2013, while the amount of financing is slightly better than the low level in the same period of 2012.
The Ongoing Trend of Delisting Chinese Stocks in the US
In the Oct. 3 announcement, Sinopec said it had officially delisted its depositary shares from the New York Stock Exchange and ceased issuing any other depositary shares on Sept. 9, while announcing that it had applied to exit the UK financial market as well. Sinopec was established on Feb. 25, 2000, and was listed on the Hong Kong, New York, and London stock exchanges on Oct. 18 and 19, 2000, respectively, with 16.78 billion H-shares. On Aug. 8, 2001, Sinopec listed its A-shares on the Shanghai Stock Exchange. Today, Sinopec will soon be listed in only two stock markets instead of four.The U.S. Congress unanimously passed the Holding Foreign Companies Accountable Act (HFCAA), which was signed into law on Dec. 18, 2020, prohibiting foreign companies listed in the United States from trading in the United States if they refuse to allow the U.S. Public Company Accounting Oversight Board to inspect their audits for three consecutive years. The HFCAA is now officially being enforced in the United States, so it is not surprising that a large number of companies from China are now delisting from the United States. In particular, the requirement for companies to declare their relationship with their government and to submit compliant audit reports is undoubtedly very difficult for Chinese companies. Those companies’ relationships with the CCP are usually clandestine, and compliant audit reports cannot be submitted due to China’s business accounting laws.
Taiwan’s Commercial Times reported in late 2021 on the exit of Chinese stocks from the U.S. market, explaining that the forced delisting of Chinese stocks from the United States reflects, to some extent, the future changes in the relationship between China and Wall Street.
With the exception of Chinese state-owned enterprises, all Chinese companies listed in the United States are doing so through a variable interest entity structure that bypasses regulation. This structure itself is designed to circumvent regulation, which the United States has long turned a blind eye to. In fact, according to NASDAQ’s own regulations, it is possible to deny companies that are listed through offshore companies and to deny them entering the pink sheet market. NASDAQ is not enforcing such regulations due to the immense profit brought by those companies to U.S. investors.
The pink sheets market has no financial requirements for listing and does not require issuers to make periodic or ad hoc disclosures. Most of the stocks listed on the pink sheets do not meet the listing requirements of the major U.S. stock exchanges and generally trade at less than $5 per share.
The CCP has long used these listed companies as a conduit for lobbying in the free world in order to influence policies and political decisions in those countries. This is happening not only in the United States, but also in other countries. For example, Clive Hamilton’s book “Silent Invasion: China’s Influence in Australia” presents the Australian case.
