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What should you do if you own US-listed Chinese stocks ordered by SEC to delist?

China, Stocks

Written by:

Zhi Rong Tan

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 NameDate provisionally identifiedIssuer NameDate provisionally identified
Zhihu Inc.April 21, 2022X FinancialMay 4, 2022
Nova Lifestyle, Inc.April 21, 2022China Southern Airlines Company Limited May 4, 2022
LOVARRAApril 21, 2022UP Fintech Holding LimitedMay 4, 2022
BeyondSpring Inc.April 21, 2022China Eastern Airlines Corporation LimitedMay 4, 2022
Luckin Coffee Inc.April 21, 2022JD.com, Inc.May 4, 2022
Aurora Mobile LimitedApril 21, 2022China Mobile LimitedMay 4, 2022
Scientific Energy, Inc.April 21, 2022Sinopec Shanghai Petrochemical Company LimitedMay 4, 2022
China Foods Holdings LimitedApril 21, 2022JinkoSolar Holding Co., Ltd.May 4, 2022
Value Exchange International, Inc.April 21, 2022Tuya Inc.May 4, 2022
JRSIS Health Care CorporationApril 21, 2022360 DigiTech, Inc.May 4, 2022
Entrepreneur Universe Bright GroupApril 21, 2022HUYA Inc.May 4, 2022
CBAK Energy Technology, Inc. April 21, 2022NetEase, Inc.May 4, 2022
ZW Data Action Technologies Inc.April 21, 2022Waterdrop Inc.May 4, 2022
AMTD IDEA GroupApril 21, 2022GDS Holdings LimitedMay 4, 2022
BEST Inc.April 21, 2022Canadian Solar Inc.May 4, 2022
Li Auto Inc.April 21, 2022Youdao, Inc.May 4, 2022
KE Holdings Inc.April 21, 2022Fuwei Films (Holdings) Co., Ltd.May 4, 2022
Huaneng Power International, Inc.May 4, 2022Xunlei LimitedMay 4, 2022
Aluminum Corporation of China LimitedMay 4, 2022Zepp Health CorporationMay 4, 2022
Gracell Biotechnologies Inc.May 4, 2022Guangshen Railway Company LimitedMay 4, 2022
Fangdd Network Group Ltd.May 4, 2022KANZHUN LIMITEDMay 4, 2022
Yatsen Holding LimitedMay 4, 2022China Petroleum & Chemical CorporationMay 4, 2022
Bilibili Inc.May 4, 2022NIO Inc.May 4, 2022
Pinduoduo Inc.May 4, 2022CooTek (Cayman) Inc.May 4, 2022
36Kr Holdings Inc.May 4, 2022Jianpu Technology Inc.May 4, 2022
Autohome Inc.May 4, 2022LexinFintech Holdings Ltd.May 4, 2022
Full Truck Alliance Co. Ltd.May 4, 2022FinVolution GroupMay 4, 2022
Yalla Group LimitedMay 4, 2022111, Inc.May 4, 2022
Gaotu Techedu Inc.May 4, 2022China Life Insurance Company LimitedMay 4, 2022
Yunji Inc.May 4, 2022RLX Technology Inc.May 4, 2022
ATA Creativity GlobalMay 4, 2022DouYu International Holdings LimitedMay 4, 2022
UTStarcom Holdings Corp.May 4, 2022Tuniu CorporationMay 4, 2022
LAIX Inc.May 4, 2022Baozun Inc.May 4, 2022
Tencent Music Entertainment GroupMay 4, 2022Fanhua Inc.May 4, 2022
Adagene Inc.May 4, 2022Burning Rock Biotech LimitedMay 4, 2022
Cango Inc.May 4, 2022Hudson Capital Inc.May 4, 2022
VNET Group, Inc.May 4, 2022Canaan Inc.May 4, 2022
Smart Share Global LimitedMay 4, 2022I-MabMay 4, 2022
Huazhu Group LimitedMay 4, 2022Qudian Inc.May 4, 2022
CNFinance Holdings LimitedMay 4, 2022PetroChina Company LimitedMay 4, 2022
UCLOUDLINK GROUP INC.May 4, 2022Genetron Holdings LimitedMay 4, 2022
Huize Holding LimitedMay 4, 2022JOYY Inc.May 4, 2022
Hello Group Inc.May 4, 2022iHuman Inc.May 4, 2022
Niu TechnologiesMay 4, 2022Chindata Group Holdings Limited May 4, 2022
Trip.com Group LimitedMay 4, 2022ReneSola LtdMay 4, 2022
Vipshop Holdings LimitedMay 4, 2022Concord Medical Services Holdings LimitedMay 4, 2022
Lizhi Inc.May 4, 2022Sinovac Biotech Ltd.May 4, 2022
17 Education & Technology Group Inc.May 4, 2022So-Young International Inc.May 9, 2022
Viomi Technology Co., LtdMay 4, 2022Antelope Enterprises Holdings LimitedMay 9, 2022
ATRenew Inc.May 4, 2022iClick Interactive Asia Group LimitedMay 9, 2022
Sunlands Technology GroupMay 4, 2022Lufax Holding LtdMay 9, 2022
BlueCity Holdings LimitedMay 4, 2022Kuke Music Holding LimitedMay 9, 2022
XPeng Inc.May 4, 2022LightInTheBox Holding Co., Ltd.May 9, 2022
ZTO Express (Cayman) Inc. May 4, 2022Dingdong (Cayman) LimitedMay 9, 2022
Agora, Inc.May 4, 2022Kingsoft Cloud Holdings LimitedMay 9, 2022
EHang Holdings LimitedMay 4, 2022DiDi Global Inc.May 9, 2022
Phoenix New Media LimitedMay 4, 2022Qutoutiao Inc.May 9, 2022
Dada Nexus LimitedMay 4, 2022China Online Education GroupMay 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 NameYear(s) identifiedIssuer NameYear(s) identified
BeiGene, Ltd.2022Microvast Holdings, Inc.2022
Yum China Holdings, Inc.2022China Automotive Systems, Inc.2022
Zai Lab Limited2022Daqo New Energy Corp.2022
ACM Research, Inc.2022Connect Biopharma Holdings Limited2022
HUTCHMED (China) Limited2022OneConnect Financial Technology Co., Ltd.2022
Weibo Corporation2022Green Vision Biotechnology Corp.2022
Futu Holdings Limited2022Legend Biotech Corporation2022
Nocera, Inc.2022Sohu.com Limited2022
iQIYI, Inc.2022Studio City International Holdings Limited2022
Baidu, Inc.2022Melco Resorts & Entertainment Limited2022
CASI Pharmaceuticals, Inc.2022Logiq, Inc.2022
Noah Holdings Limited2022  

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.

Source: InteractiveBrokers

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!

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