The Motley Fool

US Senate Approves Law to Delist Chinese Companies

Tensions between the US and China are on the rise again. Just when last year’s trade showdown seemed to be cooling, coronavirus wreaked havoc. US President Trump blamed China and even alleged that the virus was made in China.

A new saga in the US-China trade relations unfolded this week. The US Senate approved a bill that could result in the delisting of Chinese companies listed on US markets. The bill mandates that foreign companies disclose if they are owned or controlled by foreign governments.

The foreign companies listed, or that want to be listed in the US, will have to go through greater scrutiny. Failing to do so can get them delisted from the US. The recently unearthed Luckin Coffee Inc (NASDAQ: LK) scam seems to have been the trigger for the bill to pass.

Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) saw its ADRs end Friday down 5.9% while JD.com Inc (NASDAQ: JD) finished down 5.1%.

Democratic Rep. Brad Sherman of California said that:

“Had this legislation already been signed into law, US investors in Luckin Coffee likely would have avoided billions of dollars in losses.” 

Not a new development 

To be fair, delisting worries are nothing new. Last year, the Trump administration considered delisting Chinese companies listed in the US amid the tariff war between the US and China.

However, it looks different this time. First, it’s not just a consideration anymore. The US Senate has already passed the bill and it is expected to go to President Trump for signing soon.

Second, it was just about the trade war last year. The US-China relationship looks more fragile than ever now with coronavirus raging the war against humanity. Moreover, some of the US allies are looking suspiciously at China. India recently put capital controls on investments from China.

Nationalistic sentiments are on the rise around the world. With elections looming this year, President Trump will definitely try to capitalise on the public mood by going tough on China.

A long road ahead

Even after signing into law, the bill will not immediately lead to the delisting of Chinese companies in the US.

The delisting will only happen if companies fail to comply with the increased scrutiny. However, the increased scrutiny means new IPOs may choose non-US exchanges.

Can Hong Kong gain?

Last year, Alibaba carried out a second listing in Hong Kong to avoid over-reliance on the US capital markets. Baidu (NASDAQ: BIDU) is also working on the second listing in Hong Kong.

In fact, yesterday, reports emerged that Baidu is looking at delisting from the Nasdaq to avoid greater scrutiny and boost its value.

We may see more companies choosing Hong Kong as their financial home. However, Hong Kong’s own appeal depends on what course China-Hong Kong relations take.

China is in the process of trying to get a Hong Kong security law passed amid protests. As we move into the new normal, the possibility is high that we will see Chinese companies funded by Chinese capital.

Foolish conclusion

The US has been the mecca for companies looking to raise capital. It might change, at least for Chinese companies. Hong Kong may be the winner in terms of listings but will it be free to celebrate the victory?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Mayur Sontakke doesn't own shares of any of the companies mentioned.