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US Moves to Delist Chinese Companies, Will China Blink First?

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As I discussed in Delisting Impact: Alibaba, Baidu, and NIO Investors, the US Senate has passed legislation that could eventually lead many Chinese companies to delist.

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Senate passes bill to delist companies

There are still a lot of steps remaining for the legislation to become a law. The bill will have to go through a vote in the House and then President Trump. The decision was unanimous in the Senate, which shows the extent of the anti-China sentiment.

Delisting Chinese companies

Even after the bill becomes a law, a company would have to be foreign government-controlled or owned or it would have to block the PCAOB (Public Company Accounting Oversight Board) from auditing its audited accounts for three consecutive years to get delisted. In essence, Chinese companies need to play by the US stock exchange rules that every other company follows. Currently, Chinese authorities prohibit its companies from sharing underlying audit data. According to Brock Silvers, the chief investment officer at Adams Asset Management, “All Chinese companies listed in the U.S. are non-compliant in terms of audit standards.”

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List compiled by PCAOB

According to the list compiled by the PCAOB, many Chinese companies deny access to the PCAOB to conduct inspections. These companies include Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), Baidu (NASDAQ:BIDU), and NIO.

Alibaba, Baidu, and NIO stocks down on delisting fears

Notably, Alibaba, JD.com, Baidu, and NIO’s stock prices have declined by 8%, 6%, 8%, and 11%, respectively, since the Senate passed the legislation. In contrast to this performance, the S&P 500 (NYSEARCA:SPY) and the NASDAQ Composite (NYSEARCA:QQQ) rose during these three trading days. Notably, Alibaba told investors not to worry about US delisting. They are “closely monitoring the developments of the bill.”

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Will China blink first?

If the law passes, China would have to relent on its privacy laws. If not, the country’s companies could get delisted. At the same time, China can retaliate against the US. China could make it difficult for US companies to operate in China. In an interview with MarketWatch, Democratic Representative Brad Sherman said, “It’s time for China to blink first for the benefit of investors.”

Options available to Chinese listings in the US

According to a Global Times report, the director of the Finance and Securities Institute at Wuhan University, Dong Dengxin, said, “Even if the Chinese companies have to be delisted in the end, the domestic exchanges will be welcoming.”

Whether China blinks or not will depend on the relations between the two sides at the time. Also, the health of the Chinese economy could dictate Beijing’s response at the time. Meanwhile, some companies suggested that they might consider secondary listings on other exchanges. Reuters reported that Baidu might delist for NASDAQ to move closer to home to boost its valuation.

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