What Would Delisting Mean for Chinese Stocks and Investors?
The House of Representatives is making a move that could lead to eventually delisting Chinese companies. What happens when a stock gets delisted?
Dec. 2 2020, Published 9:53 a.m. ET
Chinese companies might get delisted from U.S. stock exchanges. After clearing the Senate, the House of Representatives will vote on the Holding Foreign Companies Accountable Act, which could lead to Chinese stocks eventually getting delisted like Alibaba, Baidu, JD.com, and NIO.
These companies' stocks were under pressure on Dec. 1. There are certain requirements that the listings will have to follow, much like other companies listed on U.S. stock exchanges, to keep from getting delisted. What are the requirements? Why is it so difficult to follow the regulations? What happens when a stock gets delisted? What do investors get if a stock gets delisted?
Delisting of shares
Delisting of shares means the permanent removal of a stock listed on a stock exchange from trading. The delisting can either be voluntary or involuntary. For voluntary delisting, the company makes the decision to delist the shares. There could be many reasons for this type of delisting including a merger or simply the company wants to have more control.
For involuntary delisting, regulators decide to delist a share from trading. The reasons for this type of delisting could be regulation violations, not meeting the stock exchange's listing requirements, or failure to meet the minimum financial expectations. For example, the NYSE has a rule that the 30-day average price of a stock must remain above $1 or it gets delisted.
What does delisting mean for shareholders?
For voluntary delisting, the company usually pays a higher price to shareholders than the prevailing price of the stock.
Usually, nothing changes for a stock's shareholders if it gets delisted involuntarily. They keep on holding the same percentage share in the company and are free to sell it to anyone who is interested in buying. However, there's a lot for the shareholder to lose.
First, due to the negative shock of delisting, the stock price tanks. Second, the liquidity in the stock goes down drastically, which makes it very difficult to find a buyer for the said security. Investors can either sell the stock at the best price they can get prior to delisting or wait for it to get relisted on another exchange (if that happens).
Delisting Chinese stocks
On Dec. 2, the House of Representatives will vote on the Holding Foreign Companies Accountable Act. The act could lead to Chinese stocks eventually getting delisted like Alibaba, JD.com, and others from U.S. stock exchanges. On May 20, the Senate approved new legislation that could force Chinese companies to follow the same rules as other companies listed on the NYSE and Nasdaq. The companies could get delisted if they don't follow the rules.
Under the new rules, Chinese companies will have to prove that they aren’t owned or controlled by a foreign government. Also, the companies have to let the SEC’s Public Company Accounting Oversight Board audit their statements. Failure to allow the board to audit their statements for three years in a row would lead to delisting. Chinese authorities don't let Chinese auditors submit statements to an overseas regulator.
The vote and potential delisting come amid fraud allegations against yet another Chinese company — Kandi. On Nov. 30, Hindenburg Research published a report detailing how the EV-maker used fake sales and EV hype to grab $160 million from U.S. investors. Kandi stock dropped by 28 percent that day. Earlier, another Chinese company, Luckin Coffee was delisted due to an accounting scandal, which led it to overstate its revenues.
While there have been discussions about greater scrutiny of Chinese stocks for many years, they became more pronounced under President Trump’s hard-line stance. The accounting scandal by Luckin Coffee only helped expedite the process.
Chinese companies weigh their options
The U.S.-China Economic and Security Review Commission has compiled a list of Chinese companies that are listed on U.S. stock exchanges including the Nasdaq, NYSE, and NYSE American. As of Oct. 2, there were 217 companies listed on these exchanges with a total market capitalization of $2.2 trillion.
Some of the highest-valued Chinese companies are already looking for secondary listings, most likely in Hong Kong. Some companies already have dual-listings. While top companies could go for secondary listing that could become primary if they get delisted in the U.S., most of the companies wouldn't have a listing. For example, Alibaba has a secondary listing, while NIO doesn't have one right now.
