What is the future of Chinese listings on U.S. exchanges?
This has been a pressing topic in the past weeks when the U.S. government took several actions to intensify its grip over U.S.-listed Chinese companies. Yesterday I discussed this topic as a panelist, together with Harvey L. Pitt, former SEC Chairman; Edward Greene, Partner at Cleary Gottlieb; Lorna Xin Chen, Asia Regional Managing Partner, Head of Greater China at Shearman & Sterling. Columbia Law Professor Benjamin L. Liebman moderated the panel.
We discussed the impact of the two recent actions by the U.S. That is, first, the Holding Foreign Companies Accountable Act (HFCA) that seeks to address (indirectly) the long-standing dispute on China’s blocking of U.S. audits. Second, there is Trump’s executive order demanding the delisting of Chinese firms that are deemed “Communist Chinese Military Companies”. As a response, the NYSE announced the delisting of several Chinese companies, then reversing itself. This created confusion. Now, some weeks further, we have the opportunity to reflect and look at the future of Chinese company listings in the U.S. On a fundamental level, the two measures are related in that they send a message to Chinese companies with an interest in U.S. capital markets.
Few considerations stood out from the panel. First and foremost, my panel colleagues agreed on the idea that the immediate impact for Chinese companies of these measures remains to be seen, especially now that the possible venues, and especially the emergence of the Hong Kong Stock Exchange, provide alternatives. That is, not so much because The Biden administration might have a different approach to China — also because the Act on foreign audits has bipartisan support. Are there alternatives to the PCAOB inspection of Chinese audit firms?
Rather, as Ed Greene stated, where there are restrictions, it will mostly impact retail investors. He noted that U.S. private markets are twice the size of public markets, and (sophisticated) investors will find their way into Chinese companies — be it in private markets or through foreign investment. Managing Partner at Shearman & Sterling based in Hong Kong, Lorna Chen, stated that Chinese companies were still very interested in U.S. capital markets, and that their performance in 2020 was remarkable with 11 IPOs and billions of market cap. She is seeing an ongoing interest among clients, and does not expect this to stop. Ms. Chen mentioned how China has a legal framework that is more flexible towards changing circumstances, and that she and her clients are optimistic about being able to find continuous access to U.S. capital markets — by having a pragmatic and cooperative approach.
That said, former SEC Chairman Harvey Pitt reminded us that the dispute on Chinese companies has been a delicate and difficult issue for several years — and this new Act can be seen as a tactic of U.S. lawmakers to put pressure on Beijing as part of a larger policy approach that is more skeptical towards China.
Professor Liebman weighed in on this with broader insights on U.S.-China relations. It was interesting to see members of the audience asking: “Why don’t the Chinese just abide by U.S. rules?”. This is where all panelists agreed: China as an economic and financial force is here to stay, and will be more and more important. A key insight from the panel was that U.S. and Chinese regulators (mostly the SEC and CSRC) could very well agree on a cooperative path to address issues of fraud and financial stability — but that the real challenge has become political. That is an open invitation to the new Biden administration and SEC Chairman, Gary Gensler. Meanwhile, as politics evolve, Chinese companies with interests in U.S. capital markets are advised to stay on top of this issue and pursue clear communication to investors and regulators.
The panel was hosted by the Hong Yen Chang Center for Chinese Legal Studies at Columbia Law School. Many thanks to Benjamin Liebman, Nick Pozek and the other panelists.