A crackdown by the Chinese government on its own tech companies listing on American stock exchanges could have a ripple effect that could impact U.S. investors.
MarketWatch reported that after authorities in China came down on a popular app with an antitrust hammer, the impact was felt for a number of Chinese companies already trading here. The report also noted that the move could have long-term consequences on the U.S. IPO market and also impact American tech companies.
Harry Broadman, managing director at the Berkeley Research Group LLC, told MarketWatch that the move may have less to do with an impact on the U.S. market. “It is squarely in the Chinese market — certainly for Chinese tech firms there, but also possibly U.S. tech firms operating there,” he told MarketWatch.
Reuters reported that the crackdown includes tighter supervision of Chinese firms listed offshore with additional restrictions for cross-border data transmission. However, the financial impact this can have on the U.S. IPO market and investors could be unsettling. MarketWatch, citing data from Dealogic, noted that over the last 18 months Chinese companies have invested more than $26 billion in America’s IPO market.
"It suffices to say those Chinese companies already planning to list in the U.S. will have to pause, or even abandon the plans altogether, in the face of mounting uncertainties and confusions," Fred Hu, chairman of private equity firm Primavera Capital Group, told Reuters.
Hu told Reuters that for Chinese companies are being held out of the U.S. market for now, a cause for concern among some investors here. Louis Lau, director of investments for California-based Brandes Investment Partners, told Reuters that Chinese regulators will have to be involved in overseas listings. Lau’s company holds Chinese stocks, according to Reuters.
“Overseas-listed Chinese companies may have had the mistaken impression that it can ignore Chinese regulators just because they are not listed in China," Lau told Reuters.
Going forward, China’s regulatory clampdown could increase the attractiveness of Hong Kong as investors look to sidestep the new crackdown for listing in the United States, according to Reuters, and this could drive interest in Hong Kong Exchanges and Clearing Ltd. (HKEX).
"Buying is fueled by an expectation that HKEX may become the only IPO center for Chinese firms seeking listing and the main center for raising foreign capital," Steven Leung, sales director at brokerage UOB Kay Hian in Hong Kong, told Reuters.
The ramifications on domestic investors could be huge. CNBC, citing the U.S.-China Economic and Security Review Commission, reported that the the three primary U.S. exchanges listing about 248 Chinese firms with an estimated market capitalization of $2.1 trillion.
American investors also face additional potential problems as Bloomberg News reported that Chinese regulators are considering additional changes that would let them block a Chinese company from listing in the U.S. even if it is incorporated outside the country.
The end result of the Chinese government’s crackdown, according to the CNBC report, could be fewer listings in the U.S. Citing the New York Stock Exchange, CNBC noted that 60 Chinese companies were still hoping to go public in the U.S. in 2021.