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FinanceWhat happens if you own shares of China companies that delist

What happens if you own shares of China companies that delist

Traders work on the ground of the New York Stock Exchange (NYSE) in New York City, December 8, 2021.

Brendan McDermid | Reuters

BEIJING — For Americans seeking to play the China development story, Didi’s delisting from the U.S. reveals the rising political threat of investing in U.S.-listed Chinese shares.

Following months of hypothesis, Chinese ride-hailing app Didi introduced final week that it could delist from the New York Stock Exchange and pursue an inventory in Hong Kong.

The firm raised $4 billion in an IPO in late June, however got here below regulatory scrutiny from Beijing simply days later with an order to droop new person registrations. Didi’s shares have plunged greater than 50% because the IPO.

Although Didi’s scenario is affected by company-specific components, the fallout across the itemizing comes as political strain in each China and the U.S. push Chinese companies to commerce nearer to their mainland headquarters — on the price of delisting from the U.S.

Delisting means a Chinese firm traded on an trade — just like the Nasdaq or New York Stork Exchange — would lose entry to a broad pool of patrons, sellers and intermediaries. The centralization of these totally different market members helps create what’s known as liquidity, which in flip permits traders to shortly flip their holdings into money.

The improvement of the U.S. inventory market over the many years additionally means companies listed on established exchanges are half of a system of regulation and institutional operations that can provide sure investor protections.

Once a inventory is delisted, the corporate’s shares can hold buying and selling by way of a course of referred to as “over-the-counter.”

But it additionally means the inventory is exterior the system of main monetary establishments, deep liquidity and the power for sellers to discover a purchaser shortly with out dropping cash.

“The most practical thing for a typical investor to worry about is price,” James Early, CEO of funding analysis agency Stansberry China, informed CNBC earlier this 12 months.

“You’re probably going to have to give (a soon-to-be-delisted stock) up sooner or later, so make your bet now,” he stated. “Are you better off selling now, or wait for some kind of a bounce?”

Political strain on each side

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In the last few years, many major U.S.-listed Chinese companies like Alibaba, Baidu and JD.com have completed secondary stock offerings in Hong Kong.

In the event of a stock’s delisting from New York, investors could exchange their U.S.-listed shares for the Hong Kong-listed ones. Not all U.S.-listed Chinese companies are eligible for secondary listings in Hong Kong, Morgan Stanley analysts noted.

While the Chinese government has yet to outright ban foreign listings, new rules announced this summer have discouraged what was once a rush of Chinese IPOs in the U.S.

The regulations so far range from data security reviews to industry-specific restrictions on the use of the variable interest entity structure. A VIE creates a listing through an offshore shell company, preventing investors in the U.S.-listed stock from having majority voting rights over the business. The structure is commonly used by Chinese IPOs in the U.S.

Delisting is not the end

Chinese stocks have been delisted from U.S. exchanges for reasons other than politics.

About a decade ago, a regulatory crackdown on accounting fraud led to a slew of removals. Other Chinese companies selected to return to their house market the place they might doubtlessly increase extra money from traders who had been extra accustomed to their companies.

Last summer time, Chinese espresso chain operator Luckin Coffee was delisted from the Nasdaq after the corporate revealed the fabrication of 2.2 billion yuan ($340 million) in gross sales. The inventory plunged to a low of 95 cents a share in June 2020.

But shares rose even after going “over-the-counter” and closed at $12.92 every in a single day.

Most of the Chinese start-ups that have listed in New York in the previous few years are consumer-focused know-how companies.

— CNBC’s Michael Bloom contributed to this report.

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