Recently, the US Securities and Exchange Commission (SEC) has added more than 80 companies to its list of companies that may be ordered to delist from US exchanges. JD.com, Pinduoduo, and NetEase are among the companies on an ever-expanding list that have been found to have breached a 2020 law known as the Holding Foreign Companies Accountable Act (HFCAA).
To recap, HFCAA aims to delist foreign-jurisdiction companies from US stock exchanges if they fail to meet American auditing standards for three years in a row. According to the statute, publicly listed companies that refuse US regulators’ audits can be delisted after three years of non-compliance.
While the official reason for the bill was to combat financial fraud within US exchanges, such as Luckin Coffee‘s case, many saw it as the US regulator pushing back against China.
On the bright side, following the US statement in March that it would continue to engage China, China proposed in April to revise its confidentiality laws on offshore listings. This includes removing a legal barrier to Sino-US audit cooperation and putting the onus on Chinese enterprises to preserve state secrets. We would, however, have no idea how long this would take or how effective it would be.
Considering this, the ever-growing list continues to scare investors, prompting the question: what should we do if the companies we invest in appear on this list, or if there are rumours that they will be included in the future?
Chinese companies that are currently flagged
Here is the list of firms on the provisional and conclusive lists as of 11 May 2022.
Provisional list of issuers identified under the HFCAA*
Those on the provisional list serve as a warning to companies that the SEC believes have broken the law. Companies on this list have 15 business days to seek clarification with the authority if they believe they have been incorrectly identified.
Issuer Name | Date provisionally identified | Issuer Name | Date provisionally identified |
Zhihu Inc. | April 21, 2022 | X Financial | May 4, 2022 |
Nova Lifestyle, Inc. | April 21, 2022 | China Southern Airlines Company Limited | May 4, 2022 |
LOVARRA | April 21, 2022 | UP Fintech Holding Limited | May 4, 2022 |
BeyondSpring Inc. | April 21, 2022 | China Eastern Airlines Corporation Limited | May 4, 2022 |
Luckin Coffee Inc. | April 21, 2022 | JD.com, Inc. | May 4, 2022 |
Aurora Mobile Limited | April 21, 2022 | China Mobile Limited | May 4, 2022 |
Scientific Energy, Inc. | April 21, 2022 | Sinopec Shanghai Petrochemical Company Limited | May 4, 2022 |
China Foods Holdings Limited | April 21, 2022 | JinkoSolar Holding Co., Ltd. | May 4, 2022 |
Value Exchange International, Inc. | April 21, 2022 | Tuya Inc. | May 4, 2022 |
JRSIS Health Care Corporation | April 21, 2022 | 360 DigiTech, Inc. | May 4, 2022 |
Entrepreneur Universe Bright Group | April 21, 2022 | HUYA Inc. | May 4, 2022 |
CBAK Energy Technology, Inc. | April 21, 2022 | NetEase, Inc. | May 4, 2022 |
ZW Data Action Technologies Inc. | April 21, 2022 | Waterdrop Inc. | May 4, 2022 |
AMTD IDEA Group | April 21, 2022 | GDS Holdings Limited | May 4, 2022 |
BEST Inc. | April 21, 2022 | Canadian Solar Inc. | May 4, 2022 |
Li Auto Inc. | April 21, 2022 | Youdao, Inc. | May 4, 2022 |
KE Holdings Inc. | April 21, 2022 | Fuwei Films (Holdings) Co., Ltd. | May 4, 2022 |
Huaneng Power International, Inc. | May 4, 2022 | Xunlei Limited | May 4, 2022 |
Aluminum Corporation of China Limited | May 4, 2022 | Zepp Health Corporation | May 4, 2022 |
Gracell Biotechnologies Inc. | May 4, 2022 | Guangshen Railway Company Limited | May 4, 2022 |
Fangdd Network Group Ltd. | May 4, 2022 | KANZHUN LIMITED | May 4, 2022 |
Yatsen Holding Limited | May 4, 2022 | China Petroleum & Chemical Corporation | May 4, 2022 |
Bilibili Inc. | May 4, 2022 | NIO Inc. | May 4, 2022 |
Pinduoduo Inc. | May 4, 2022 | CooTek (Cayman) Inc. | May 4, 2022 |
36Kr Holdings Inc. | May 4, 2022 | Jianpu Technology Inc. | May 4, 2022 |
Autohome Inc. | May 4, 2022 | LexinFintech Holdings Ltd. | May 4, 2022 |
Full Truck Alliance Co. Ltd. | May 4, 2022 | FinVolution Group | May 4, 2022 |
Yalla Group Limited | May 4, 2022 | 111, Inc. | May 4, 2022 |
Gaotu Techedu Inc. | May 4, 2022 | China Life Insurance Company Limited | May 4, 2022 |
Yunji Inc. | May 4, 2022 | RLX Technology Inc. | May 4, 2022 |
ATA Creativity Global | May 4, 2022 | DouYu International Holdings Limited | May 4, 2022 |
UTStarcom Holdings Corp. | May 4, 2022 | Tuniu Corporation | May 4, 2022 |
LAIX Inc. | May 4, 2022 | Baozun Inc. | May 4, 2022 |
Tencent Music Entertainment Group | May 4, 2022 | Fanhua Inc. | May 4, 2022 |
Adagene Inc. | May 4, 2022 | Burning Rock Biotech Limited | May 4, 2022 |
Cango Inc. | May 4, 2022 | Hudson Capital Inc. | May 4, 2022 |
VNET Group, Inc. | May 4, 2022 | Canaan Inc. | May 4, 2022 |
Smart Share Global Limited | May 4, 2022 | I-Mab | May 4, 2022 |
Huazhu Group Limited | May 4, 2022 | Qudian Inc. | May 4, 2022 |
CNFinance Holdings Limited | May 4, 2022 | PetroChina Company Limited | May 4, 2022 |
UCLOUDLINK GROUP INC. | May 4, 2022 | Genetron Holdings Limited | May 4, 2022 |
Huize Holding Limited | May 4, 2022 | JOYY Inc. | May 4, 2022 |
Hello Group Inc. | May 4, 2022 | iHuman Inc. | May 4, 2022 |
Niu Technologies | May 4, 2022 | Chindata Group Holdings Limited | May 4, 2022 |
Trip.com Group Limited | May 4, 2022 | ReneSola Ltd | May 4, 2022 |
Vipshop Holdings Limited | May 4, 2022 | Concord Medical Services Holdings Limited | May 4, 2022 |
Lizhi Inc. | May 4, 2022 | Sinovac Biotech Ltd. | May 4, 2022 |
17 Education & Technology Group Inc. | May 4, 2022 | So-Young International Inc. | May 9, 2022 |
Viomi Technology Co., Ltd | May 4, 2022 | Antelope Enterprises Holdings Limited | May 9, 2022 |
ATRenew Inc. | May 4, 2022 | iClick Interactive Asia Group Limited | May 9, 2022 |
Sunlands Technology Group | May 4, 2022 | Lufax Holding Ltd | May 9, 2022 |
BlueCity Holdings Limited | May 4, 2022 | Kuke Music Holding Limited | May 9, 2022 |
XPeng Inc. | May 4, 2022 | LightInTheBox Holding Co., Ltd. | May 9, 2022 |
ZTO Express (Cayman) Inc. | May 4, 2022 | Dingdong (Cayman) Limited | May 9, 2022 |
Agora, Inc. | May 4, 2022 | Kingsoft Cloud Holdings Limited | May 9, 2022 |
EHang Holdings Limited | May 4, 2022 | DiDi Global Inc. | May 9, 2022 |
Phoenix New Media Limited | May 4, 2022 | Qutoutiao Inc. | May 9, 2022 |
Dada Nexus Limited | May 4, 2022 | China Online Education Group | May 9, 2022 |
Conclusive list of issuers identified under the HFCAA
Companies that have failed to seek clarification with the authority are then placed on the conclusive list. This simply means that they are officially on the naughty list and may be delisted if they do not take appropriate action within three years.
Issuer Name | Year(s) identified | Issuer Name | Year(s) identified |
BeiGene, Ltd. | 2022 | Microvast Holdings, Inc. | 2022 |
Yum China Holdings, Inc. | 2022 | China Automotive Systems, Inc. | 2022 |
Zai Lab Limited | 2022 | Daqo New Energy Corp. | 2022 |
ACM Research, Inc. | 2022 | Connect Biopharma Holdings Limited | 2022 |
HUTCHMED (China) Limited | 2022 | OneConnect Financial Technology Co., Ltd. | 2022 |
Weibo Corporation | 2022 | Green Vision Biotechnology Corp. | 2022 |
Futu Holdings Limited | 2022 | Legend Biotech Corporation | 2022 |
Nocera, Inc. | 2022 | Sohu.com Limited | 2022 |
iQIYI, Inc. | 2022 | Studio City International Holdings Limited | 2022 |
Baidu, Inc. | 2022 | Melco Resorts & Entertainment Limited | 2022 |
CASI Pharmaceuticals, Inc. | 2022 | Logiq, Inc. | 2022 |
Noah Holdings Limited | 2022 |
Yes, there are a lot of companies on this list, and more may be added in the near future. Check out the SEC website to keep up with the companies on the list.
So, as an investor, what can you do to avoid the drama?
What are your options? (Before the announcement of delisting)
Let’s start with the preventative measures:
Avoid such companies
The simplest solution is to avoid investing in these companies. There are so many good stocks out which you can consider. So if you do not have the risk appetite, skip it.
Converting US shares to their foreign equivalents
If you are concerned or own shares in companies that are already on the list, you might consider converting your shares to other exchanges or, in the first place, avoid Chinese stocks listed in the US.
In fact, many Chinese stocks have dual listings, such as Alibaba, which is listed as BABA in the US and 9988 on the Hong Kong exchange. In this case, you should go for the one listed on the Hong Kong exchange. Of course, Hong Kong isn’t the only choice available. In addition to its NYSE and HKEX listings, Nio, a Chinese electric vehicle company, recently had its application to list its shares on the Singapore Exchange approved. Many other companies can also be found listed in Europe etc.
To convert your shares, the easiest way is you simply sell your US equities when the market opens, and then buy when the other market opens.
Another alternative is if your brokers provide access to both markets, i.e. US and Hong Kong. You can request a direct conversion through the ADR Conversion process.
As an example, let’s look at InteractiveBrokers. You first need to determine which ADRs can be converted.
You may verify if your stocks are convertible using this link, as well as the conversion ratio and expenses to convert, as shown in the image below.
For a fee of USD 500, you would then be able to do this direct transfer. Yes, the cost is USD 500; hence the first way is probably the best. However, if you indeed have a substantiative position, you can follow the steps here if you are using IBKR.
Nevertheless, this method only works if your investment company has a dual or even triple listing. In the case of DiDi Global Inc, this would not work as it does not have a secondary listing anywhere else and the fact that the Chinese authorities continue to block its relisting plans.
Of course, while Didi is not forced to delist under the HFCAA, others on the list may face a similar course of action. In the case of Didi, investors will gather on 23 May 2022 for an EGM to vote on the delisting. As of now, we still do not know which way it will go. Would it be delisted? What would happen if it did?
This uncertainty could also explain why stocks added to the list have seen a significant increase in volatility.
What are your options? (After the announcement of delisting)
What may happen if you are willing to take the risk and hold US-listed Chinese shares and it is on the verge of delisting? Well, this depends on the company and what actions they would want to take.
Scenario 1 – Privatisation
The first would be the company’s privatisation. Companies about to be delisted can choose to buy back their shares at a predetermined price. While an EGM would ultimately decide the price it would delist, investors like you and me would have little say.
The management’s goodwill also determines this price; will they delist at the IPO price or at the current market price, which is most likely lower? Nobody knows. The process would be identical to what we saw with Twitter when Elon Musk acquitted it for $54.20 per share, resulting in all shareholders receiving $54.20 in cash for each share of common stock they own. However, unlike Twitter, you are unlikely to get a premium above the current market price.
Scenario 2 – ADR Conversion
If the company has a dual listing, it is not too late to jump ship now. However, because this bad news is likely to cause a drop in share prices in both the US and other exchanges, you may even consider cutting your stake and buying other stocks instead of moving your shares.
Scenario 3 – Over the counter
If no privatisation occurs before the delisting, the company may be traded over the counter, which Didi shares may become. You will still possess the shares in your brokerage account, but you may be unable to trade them if your broker does not support OTC stocks.
TD Ameritrade is an example of a brokerage that facilitates such transactions. If you have a TD Ameritrade account, you can purchase Chinese companies that are traded over the counter in the United States, such as Tencent (ticker symbol TCEHY). The disadvantage is that there is much less liquidity and a higher commission of USD $6.95 than a typical commission of $0.
Scenario 4 – Up to your imagination
There have been a lot of interesting agreements over the years as companies try to maximise their benefits and package them elegantly for investors. A delisting company may combine the above, or maybe, get bought over by another company where you will receive its shares. All of this is dependent on the company, which is why you should aim to avoid situations where you have no control over your stock (sort of).
Conclusion
That’s it; the above is a guide for you if your company appears on the watchlist or you’re concerned it could. However, your concerns may not be as significant as you believe. Didi’s fate is so horrible because they enraged the CCP, and unfortunately, they helped serve as an example for others that no one is above the CCP in China.
Moving forward, the Chinese and US regulators have stated that discussions are ongoing, and we can only hope that they will be rational. In the worst-case scenario, many equities would still have three years before delisting, giving you time to decide. Nevertheless, while we can be hopeful, we must also be careful and conscious that such risk exists if we want to invest in Chinese stocks listed in the United States.
Invest Safely!