Analysis: More U.S.-listed Chinese firms seen seeking backup listings as new audit law looms

[December 03, 2020]  By Scott Murdoch and Kane Wu

HONG KONG (Reuters) - The rush by U.S-listed Chinese companies to secure a secondary listing in Hong Kong or China is only set to intensify as the United States readies a new law allowing it to kick firms off its exchanges if they do not comply with U.S. auditing rules.

The "Holding Foreign Companies Accountable Act" is expected soon to be signed into law by U.S. President Donald Trump after it was passed by the U.S. House of Representatives on Wednesday. It stipulates that failure to comply with the U.S. Public Accounting Oversight Board's audits for three years in a row will mean a U.S. delisting.

While it applies to companies from any country, the legislation's sponsors intended it to target Chinese firms.

Authorities in China have long been reluctant to let overseas regulators inspect local accounting firms, citing national security concerns. If they do not bend, there may be little the companies themselves can do to prevent a delisting.

"The passage through the House will mean that wave of secondary offerings will continue as China is unlikely to make a concession on the accounting access front," said Aequitas Research partner Sumeet Singh, who publishes on Smartkarma.

"Even if it does make a concession, it will probably do so at the last minute, in year three, and hence most companies will have already hedged their bets by then with a secondary offering in Hong Kong."

Escalating U.S.-China tensions that have included the U.S. blacklisting of major firms such as Huawei Technologies Co Ltd have already spurred a swathe of U.S.-listed Chinese firms to embark on "backup" listings over the past two years.

This year, a record number carried out secondary listings in Hong Kong with $19.1 billion raised in 12 transactions, according to Refinitiv data, compared to $14.8 billion in 2019.

Among them were e-commerce giant JD.Com, gaming company NetEase and Yum China, the exclusive licensee of the KFC, Pizza Hut and Taco Bell brands in the world's second-biggest economy.

While analysts expect Joe Biden to likely stick with the Trump administration's harsh policies towards Chinese tech giants when he enters the White House in January, some expect that over the next three years, U.S. and Chinese regulators will make compromises that will allow continued U.S. listings.

REGULATORY COMPROMISE

Chinese foreign ministry spokeswoman Hua Chunying told a news briefing in Beijing on Thursday that China was firmly opposed to the way the United States was politicising securities oversight.

Raindrops hang on a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York City, New York, U.S., October 26, 2020. REUTERS/Mike Segar

"This law severely weakens the trust global investors have in U.S. capital market, and will ultimately harm the international status of U.S. capital market and the interests of U.S. itself," she said.

The China Securities Regulatory Commission (CSRC) said last month it looked forward to holding discussions with its counterparts as soon as possible on "specific plans" to conduct joint inspections of Chinese firms listed in the United States

It did not immediately respond to a request for comment on Thursday.

Experts also believe that, despite the new law, at least some Chinese firms looking to go public will factor in that a compromise will be worked out and still seek to list in the United States.

"The U.S. markets remain extraordinarily deep pools of liquidity and sector expertise that produce strong valuations for quality issuers. (China)-based companies will continue give considerable weight to the many commercial advantages of being listed in the United States," said Jason Elder, a partner at law firm Mayer Brown.

There are 217 Chinese companies listed in the United States worth a combined $2.2 trillion, the U.S.-China Economic and Security Review Commission said in early October.

In a sign that Wall Street has not yet lost its allure as a listing venue despite the passing of the auditing bill through both houses, China's 17 Education and Technology Group is seeking to raise $288 million in a Nasdaq listing and is due to price its shares on Thursday.

The tutoring business could be valued at up to $2.2 billion, according to its regulatory filings.

(Reporting by Scott Murdoch and Kane Wu in Hong Kong; Additional reporting by Engen Tham and Samuel Shen in Shanghai; additional reporting by Tian Yew in Beijing; Writing by Sumeet Chatterjee; Editing by Edwina Gibbs and Mark Potter)

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