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Frostier times ahead for Chinese IPOs in the US?


Navarro: is FangDD his cup of tea?

When the US began to advocate tariffs to reduce its trade deficit in 2018, many thought it was a classic Donald Trump bargaining chip to get a better deal from China. Most still do.

But many now believe the trade war represents just the first great schism between the two countries as they jostle for global supremacy. In recent months, a new fault line has started developing and it worries the financial markets far more because it impacts them directly.

This concerns potential restrictions on US investor access to China’s stock markets, as well as Chinese companies access to American ones. It portends a world where the capital markets face a financial ‘iron curtain’ dividing East and West.

That might sound apocalyptic but it reflects the tone of recent US legislative moves. Congressman Jim Banks, for instance, introduced a bill seeking to prevent the principal retirement plan of federal government employees from switching its index benchmark away from the developed markets to an emerging markets’ one including China and Russia.

If the bill is passed, the risk is that other US state and federal investment plans, with a combined $5 trillion of assets under management, would follow suit.

Then there’s the EQUITABLE Act (Ensuring Quality Information & Transparency for Abroad Based Listings on our Exchanges), introduced by a bipartisan group of senators. This would give all listed companies three years to open up their audits for inspection by the Public Company Accounting Oversight Board (PCAOB), or face delisting.

As we wrote in WiC463, this has long been a running row between the two countries. The US set up the PCAOB after its own Enron-related accountancy scandals. For now the agency cannot inspect US-listed Chinese companies (Beijing objects on national security grounds). However, last December, the PCAOB issued a joint statement with the US SEC decrying its lack of access to 224 companies with a then market capitalisation of $1.8 trillion (213 from Hong Kong and China: the rest from Belgium).

In a CNBC interview US trade advisor Peter Navarro said the Trump administration has no plans to stop Chinese companies listing “at this time” – a threat that got headlines earlier this month. But he highlighted how “fraud is ubiquitous” among Chinese companies and that every time the MSCI increases its China weighting, US investors are exposed to more financial risk.

Dong Dengxin from Wuhan University’s Financial Securities Institute told the Global Times that the US is behaving in a “vicious” manner. But the newspaper surmised the US government will “trip over its own feet” as a more hostile climate in New York will only lure the big guns of the Chinese ADR world such as Alibaba and to list instead in Hong Kong.

Losing Chinese IPOs also wouldn’t play well with Wall Street’s titans, given the fee differentials between New York and Hong Kong.

However, all of the bad news about potential delistings didn’t deter a rising star of China’s online real estate business from filing a prospectus last Wednesday to list in New York. The somewhat counterintuitive move was made by unicorn firm FangDD, a web-based property platform that was founded in 2011 by entrepreneur Duan Yi.

FangDD helps property brokers – 170,000 are registered to use its platform – to transact online, and claims that its ‘killer app’ is a database of 131 million verified home purchase and rental agreements. Aside from this informational edge, it also provides agents with the tools needed to complete an exchange between a buyer and a seller.

The gross merchandise value of deals done on its platform reached Rmb91.3 billion ($12.8 billion) in the first half of this year, double what was transacted in the same period in 2018. However, the IPO prospectus also reveals that FangDD only gets a small cut from these huge volumes: it made just Rmb103 million of profit in the first half of 2019.

Whether or not this is the sort of Chinese business Navarro wants US investors to have access to remains to be seen – but for the moment Wall Street’s door still remains open to such China IPOs.

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