10 Oct

Delisting Woes: Make Trade, Not War

WRITTEN BY Shankar Iyer

If Shakespeare were an investor in today’s market, maybe he’d have said, “To delist, or not to delist, that is the question,” instead. If we look at the current market trends, we might find the sentiment very apt. US regulators—and even some Chinese tech companies, such as Alibaba (BABA)—are no doubt wondering the same thing. So if everyone is on the same page, why is there conflict among those involved? Or does the Trump administration feel it’s time to reconsider the 2013 Memorandum of Understanding between the US and China?

Some of the new tariffs imposed by the Trump administration could come into effect on October 15. Political risk consultancy Eurasia Group expects the US and China to reach a potentially “fragile agreement” in their trade talks this week. The agreement could see China purchasing farm products from the US in lieu of squashing the tariffs on Chinese exports to the US—a quid pro quo, perhaps. But where does the agreement leave tech stocks?

The story so far

Back in 2013, the US and China agreed on a Memorandum of Understanding. One of the clauses specified that not all Chinese companies’ documents would be directly available to US regulators. In the present global culture, this provision has become redundant. Data transparency is paramount. After all, in the global markets, nationalist agendas should take a back seat. They shouldn’t be the sole driving force behind the financial markets.

The US-China trade war is creating a bubble of sorts, and that bubble keeps growing. Such a scenario should be avoided for the benefit of the global economy. The trade war is a dilemma for US regulators, Chinese bureaucrats, traders, and investors. Now, even consumers could be left wondering what will happen if the top two economies duke it out in the capital markets, as it’s still not certain who would win. One thing seems certain: everybody’s going to lose something.

Could delisted Chinese companies opt for a new trading ground?

The trade war is rooted in concerns about the transparency of Chinese companies’ records. Let’s face it: the US is making demands, and China isn’t accepting them. To strong-arm China and protect US investors, the Trump administration has a safeguard in place. It includes imposing hefty tariffs, raising concerns over intellectual property rights infringement, and even holding Chinese goods up at the docks. Isn’t this the result of a conflict between federal oversight and imperial control?

Chinese tech companies might consider other exchanges to raise funds and woo investors. On the other hand, US investors could look for other investment opportunities while the fates of companies such as Alibaba, Baidu (BIDU), and JD.com (JD) lie in the hands of administrators. But what about traders and investors—the ones who want to put geopolitics aside, trade in prospective ventures, and potentially make long-term investments—irrespective of the country from which they originate?

Delisting fears spike trading volumes

Let’s look at the trading volumes of reputed Chinese tech stocks Alibaba, Baidu, and JD.com and compare them to US e-commerce player Amazon. If we put the trade war aside, what will we find the statistics indicate?

Delisting Woes: Make Trade, Not War

The chart above shows the average trading volumes for the six months from April 9 to October 9, as per Reuters.

In these six months, there were many instances of bulk deals. The trading volumes for two of the three Chinese tech stocks were far higher than Amazon’s. The array of opportunities could have made scalpers, momentum traders, and intraday traders very happy. Debate about whether or not to include these stocks in pension funds is an entirely different matter. But what about nondiscretionary portfolios and proprietary traders? They could have made the best of the opportunity with strategic trading.

On October 9, Alibaba stock saw an order imbalance on the sell side. No company would want its stock placed at a sell at the end of the trading day.

Even if these Chinese stocks were to be delisted, traders could very well move to over-the-counter trading in BABA, JD, or even BIDU. One of the essential things most traders want is a reasonably good opportunity to trade. Could US traders lose this opportunity because of an unwarranted trade war?

Could Chinese stocks head to Hong Kong?

Some sources that suggest Alibaba will move back to a place that’s closer to home. What about Hong Kong? News about its listing on the Hong Kong Exchange is making the rounds, but who would benefit? Hong Kong fund managers might still consider these stocks for their pension funds. Alibaba, JD.com, and Baidu could reap the rewards. But what would happen to US companies with trade ties to these Chinese companies? Whatever decision the administration might make, we can’t ignore that the current value in the market is being eroded.

Conclusion

The views expressed above are my personal opinion. I don’t endorse any company, nor do I encourage the trade war. Trading should focus on generating value and opportunities in the global market. The US and China should collectively focus on more substantial factors that can add value to the economy. An inclusive solution between the world’s top two economies is a necessity. That way, business leaders can focus on more significant problems, such as climate change and the reshaping of business values.

The trade war will not determine whether the US or China is right—only which stocks are left.

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