Beijing’s decisions last month cost U.S. investors a lot of money. Regulatory moves against Chinese companies that have recently listed shares on American exchanges have all but shut down the burgeoning market for such listings. They have also sliced deeply into the value of companies that had already been listed.
On the surface, the moves would seem to be against China’s interests. The flow of American money from Chinese companies listing in the United States through American depositary receipts (ADRs) offered China a great source of financing for growth and development. But as the Chinese Communist Party (CCP) has proved repeatedly, it values secrecy and control over just about everything else, including economic growth and wealth.
However welcome the dollar flow was, it demanded disclosures on the state of Chinese business that the country’s leadership couldn’t tolerate and further gave too much control to U.S. regulators and the American owners of these shares.
So now the market for initial public offerings (IPO) by Chinese companies in America has all but shut down. The value of Chinese companies already listed in the United States has fallen almost 30 percent, and in July alone, the owners of these ADR shares lost upwards of $400 billion. In the words of a Wall Street Journal headline, American investors must feel “played” by China’s leadership. Many in New York and elsewhere in the United States now must wish that President Donald Trump’s blacklist of Chinese companies selling shares here had been larger, had lasted longer, and that President Joe Biden had expanded it.
The damage, of course, is done.
To protect American investors in the future, the Securities and Exchange Commission (SEC) promised to review its guidelines for listing and demand more disclosures and assurances from Chinese firms wishing to list here. For what it’s worth, Beijing has expressed shock at what its actions have precipitated and has promised in the future to take better account of market sensitivities. Even if these measures allow the dollar flow to grow again, it will be a long while, if ever, before it can return to former levels. China will miss the financial support for future growth, but the CCP will have what it wants.
Beijing has long maintained prohibitions against foreign ownership on a wide range of companies, especially in technology, information, and, of course, defense. Many managements have sidestepped these strictures by establishing what are called “variable-interest entities.” These could gather U.S. and foreign capital generally by setting up an overseas shell corporation that was contractually entitled to a portion of the parent company’s profits and in which foreigners could buy shares.
The regime in Beijing seemed okay with such arrangements because the Chinese company got foreign financing with disclosures only on the shell corporation, not the parent company, and the foreigners never had ownership or control in the producing company. It was, of course, a different matter with the Chinese firms that were listed on American exchanges. With these, both the SEC and the exchanges could demand disclosures, could impose additional regulations, and direct ownership imparted control to the American buyers. Even though these weren’t forbidden firms, this was clearly too much for the CCP.
In the case of firms where there are no such strictures, Beijing clearly has taken a different route to control matters. The most recent event provides a perfect illustration. The Chinese ride-hailing company Didi had just completed a blockbuster IPO in the United States. The Chinese regime seemed not to object, but then immediately used its regulatory authority to forbid Didi from signing up any more users. Didi’s shares in the United States suddenly became—if not worthless, then a lot less valuable than they looked during the IPO. Beijing reacted similarly to a large tutoring firm when it listed an ADR by forbidding it to teach what the state schools taught, in other words, its most popular subjects. These actions, though on the surface having nothing to do with the listings, prompted many Chinese firms to cancel their plans to list and cast doubt on the value of the 418 Chinese firms already listed in the United States.
The promise by the CCP to exercise more sensitivity in the future and by the SEC to seek greater disclosures and assurances may well be moot. Few new listings are likely now. Indeed, many Chinese firms that were in line for IPOs have canceled those plans. American investors no doubt have already vowed to exercise a lot more care with their purchases or simply stay away from Chinese listings altogether.
These developments, coupled with the decisions of American producers to diversify supply chains away from China, make it clear that the long-discussed decoupling of the Chinese and U.S. economies is proceeding apace, whatever the intentions of the two governments.
