Chinese companies facing back pressure in the US are protecting bets in Hong Kong

NetEase attributed its decision in part to the need for more funds, which it wants to use to expand its business. But it has also made it clear that he thinks the United States is becoming hostile to Chinese companies because they see the regulator and lawmakers as new rules that would lead to tighter oversight. Some restrictions might even make it harder to advertise or keep a store in New York.

Adopting such rules “could cause investor uncertainty for affected issuers, including us, our market price [US shares] it could be adversely affected and could be excluded from the list if we cannot “meet the requirements,” NetEase wrote in submissions to the Hong Kong Stock Exchange.

NetEase’s recognition is a sign of how much the U.S.-China relationship has deteriorated – and how much it is in danger for Chinese companies that don’t develop a sustainable backup plan.

Other companies are also thinking about Hong Kong

“Chinese tech giants see Hong Kong as an environment,” said Brock Silvers, chief investment officer for Hong Kong-based Adamas Asset Management.

He added that the city is “under Chinese control, but still with access to US dollars.” Unlike mainland China, where there are strict restrictions on capital entering and leaving the country, Hong Kong allows capital to flow more openly. The city currency is also freely convertible.

NetEase is also not the last company to deal with Hong Kong. Approximately 37 Chinese companies qualify for this, according to data provider Refinitiv, based on their market limits, revenue volumes and compliance capabilities.

At least a handful of companies trading in New York City already seem to be thinking about it. An e-commerce company JD.com (J D) received approval from the Hong Kong Stock Exchange for secondary listing in Hong Kong and submitted a prospectus published on Friday. Bloomberg reported that the company could start trading as early as this month. Technical companies Baidu (BIDU) and Trip.com (TCOM) may be considering similar plans, according to various Chinese media reports.

Baidu and Trip.com declined to comment. But Baidu founder and president Robin Li recently suggested that his business could be turned to Hong Kong if needed.

“We are really following the US government’s stricter regulations on Chinese companies,” Lee said he told the state-run China Daily last month, “We’re talking internally about what we can do to deal with this, including the secondary census in Hong Kong.”

Motivations develop

New York has long been an attractive option for foreign companies to go public. Wall Street has the world’s largest stock exchanges and the ability to appropriate huge amounts of investment capitalFor Chinese companies, the New York list also gave them the opportunity to evade strict IPO rules in China, including banning companies with certain types of stock structures.

But Beijing has released some of those restrictions in recent years as part of efforts to bring Chinese companies home. The country is trying to improve its position as a major technological superpower, and the closer some of its most respected companies are, the more influence the government can have over them.

The return to Alibaba refers to the pleasant enjoyment of China and the purchase of war insurance
Desire to impress Beijing it is widely quoted as a big reason for Alibaba’s decision to enumerate in Hong Kong last fall – although analysts also pointed to tensions between the US and China and the need to mitigate political risks as a significant factor.

“The political calculus that forced Chinese technology companies listed in the U.S. in search of secondary inventories was originally Beijing’s desire to put those companies under their bureaucratic control,” Silvers said. “But it developed in the light of the trade war and the subsequent separation.”

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It’s not entirely clear how quickly a possible new U.S. rule could lead to problems for Chinese companies trading in New York. For example, it is intended for a bill that has not yet passed the U.S. House of Representatives force those companies to open their books to US regulators – a condition backed by Beijing that requires companies traded abroad to keep their audit documents in mainland China where they cannot be reviewed by foreign agencies.

But that law would force that company to be deleted if they could not be revised for three consecutive years, Goldman Sachs analysts say.

Although the potential for tighter regulatory oversight “is likely to accelerate their trend of double entry into the EU [Hong Kong] market, ”Goldman analysts wrote in a recent report.

The pressure also comes from the Trump administration. Secretary of State Mike Pompeo praised the Nasdaq on Thursday for proposing new compliance rules that could affect Chinese companies, adding that other stock exchanges should consider similar regulations.

“U.S. investors should not be exposed to hidden and unnecessary risks associated with companies that do not adhere to the same rules as U.S. companies,” Pompeo stands in the statement, “Nasdaq’s action should serve as a model for other exchanges in the United States and around the world.”

Pros and cons in Hong Kong

The wave of secondary listings could also be largely in favor of Hong Kong’s financial markets, where long-term stability was threatened by last year’s anti-government protests, further encroachment by Beijing and escalating tensions between the United States and China.
The U.S. could sever its special relationship with Hong Kong. But for Western companies, it’s complicated
For example, analysts at Jefferies recently suggested that the benchmark of the Asian financial hub Hang Seng index (HSI) eventually it will have a complete transformation as more and more Chinese internet companies state in Hong Kong, thus increasing more stocks in the city, such as banks and real estate companies. Such a “census emigration” could add nearly $ 560 billion to Hong Kong’s market capitalization and raise $ 28 billion in capital.
In a recent research note, Jefferies analysts compared Dow Jones Industrial Average (indu) according to Hang Seng, saying the New York index surpassed the Hong Kong benchmark because of its willingness to replace “standing” companies of “successful” high-growth companies.

“We believe [Hang Seng] it will undergo a similar change in the next few years, and will become an index that largely reflects the growth of new economic firms in China, ”they wrote.

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Alibaba was, after all, a great success for the city. Shares listed in Hong Kong have jumped 19% since they started trading in November last year.

“Other companies are following suit,” said Hong Hao, director and head of research for Bank of Communications International in Hong Kong. “It pays to have a plan B.”

Trading in Hong Kong is not risk-free. The city has become a focal point in the Washington-Beijing conflict: President Donald Trump said last week that the United States wants to end its special economic and trade relationship with Hong Kong, which could jeopardize the city’s status as a center for international business.

Trump’s announcement, however, did not include specific sanctions related to the Hong Kong financial sector. And the display of the Hong Kong dollar for the U.S. dollar seems certain for now: City officials assured investors this week that they have enough reserves to maintain the mooring, which trades the city’s currency in a narrow and stable range.

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