China Economy & Business Financial Regulation United States and Canada

Issue Brief

February 25, 2021

Delist or not delist: A $2.2 trillion US-China auditing dispute

By Jeremy Mark

 

The economic and financial forces set in motion by the COVID-19 pandemic—global recession and ultra-loose monetary policies that have driven a cross-border search for higher yield—have contributed to a slow shift of international capital toward China’s markets. Now, intensified US-China tensions—especially the targeting of Chinese companies for delisting from US stock markets—have the potential to heighten that trend.

A longstanding dispute regarding US regulators’ access to Chinese companies’ books—standard disclosure practice for virtually all other foreign countries listed on US markets—could accentuate that shift. Legislation passed unanimously by both houses of the US Congress in 2020 has started the clock ticking on a process that could result in the delisting of more than two hundred Chinese companies, representing about 6 percent of US stock-market capitalization, in the next three years. It is an issue that was largely separate from the Donald Trump administration’s efforts to restrict the commercial activities of Chinese companies with ties to China’s military and security services.

While US markets may ultimately take a mass delisting in stride, and investment banks would likely benefit, many US investors could end up facing losses. Moreover, the exodus of companies from Wall Street would lift the profile of China’s financial markets, including a Hong Kong market that has lost considerable allure because of Beijing’s political crackdown there.

The majority of companies threatened with delisting (which fundamentally have no say in the disclosure dispute) are private-sector firms that would lose access to the prestige and lower-cost financing that accompany a US listing. They would also be more vulnerable to shifting political winds in China—most recently underlined by the crackdown on Alibaba, the online retail and fintech giant that would be the most prominent company to face US delisting.

These outcomes still might be avoided: Chinese regulators have signaled a willingness to engage more seriously in negotiations on the disclosure issue, and that suggests an opening for the Joe Biden administration as it comes to grips with Trump administration actions toward Beijing and refines its own China policy.

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