When former steam engine stoker Harland Sanders opened a roadside restaurant in Kentucky during the Great Depression, he could never have imagined a day when his fried chicken would become a geopolitical battleground.
A century later, that is exactly the situation the company finds itself in. In Russia, for instance, fans of his fast-food can no longer order a bucket of KFC’s chicken thighs and drumsticks, as the chain’s outlets have been closed as part of an international boycott following the Russian invasion of Ukraine.
In China, consumers can still enjoy their dragon twisters (fried chicken wraps, with duck sauce) at KFC. But investors on the New York stock exchange may soon find that they can’t trade shares in the company that owns the brand. That is because Yum China is one of five companies on track for a delisting, after an announcement from the Securities and Exchange Commission (SEC) on March 9.
The news prompted a sharp sell-off in all five of the group –Yum China, tech firm ACM Research and the three biotech US-listed stocks: BeiGene, HutchMed (backed by Hong Kong’s richest tycoon Li Ka-shing) and Zai Labs.
On March 9, shares in Yum China had closed at $49.81 on the New York Stock Exchange (NYSE). By the end of March 14, those shares had dropped in price to $36.13, losing over a quarter of their value.
Since then, the price has partly rebounded, closing at $43.33 in New York on Thursday. But investors took initial fright as a threat they had known about for some time suddenly took more concrete form.
US regulators have been frustrated for years about a denial of access to much of the data underpinning Chinese audits. But the Chinese government has refused the requests for full disclosure, saying that national security legislation prohibits them from turning over audit papers.
The move from the SEC has been in the works since December 2020 when the then occupant of the White House Donald Trump signed the Holding Foreign Companies Accountable (HFCA) Act into law. This December, the SEC adopted detailed rules to implement it. Companies have three years to comply, or be delisted. That grace period may drop to two years following the passage of the Accelerating HFCA Act through the Senate last summer, although the legislation is awaiting presidential sign-off.
The five companies – including Yum China – now on track for delisting have topped the list simply because they filed their 2021 financial accounts first. The reality is that unless a regulatory agreement is reached, every other Chinese company on an American bourse will soon follow suit once they file their own accounts.
At issue is the fact that Chinese regulations (Article 177 of the revised Securities Law) do not allow companies to give America’s Public Company Accounting Oversight Board (PCAOB) authority to inspect their audits. In total, the PCAOB has said it’s been blocked from reviewing the audits of more than 200 companies based in China or Hong Kong, including Alibaba, PetroChina and Baidu. All of them are expected to join the other delisting candidates in the next few months.
Back in WiC270, we noted how legislative moves in the US to restrict Chinese corporate access to American capital markets sounded “apocalyptic”. Later, Washington started to advocate tariffs as a means of countering what it deemed as unfair trade and investment behaviour from the Chinese. At the time, many thought the Trump administration was using tariffs as a bargaining chip in a bid to reduce the US trade deficit. Yet in the last two years it has become clearer that the tariffs were another huge crack in a financial fault line between the US and China. The two economies seem to be headed on increasingly separate paths.
Even so, it seemed unimaginable until relatively recently that American stock markets would wave goodbye to hundreds of Chinese companies, not to mention the trading volumes they bring to Wall Street.
If all these firms are forced out of the US, they will take about $1.5 trillion of market capitalisation with them. That would represent a major blow to America’s financial markets, albeit not a threat to its bourses’ global leadership: the US was still the comprehensive number one in equity markets by a clear margin this month, with $46 trillion of capitalisation. Mainland China’s stock markets were a distant second on a combined $11.31 trillion and Japan third on $5.78 trillion.
Since the SEC set the delisting wheels in motion, its regulatory counterpart in China has also gone public in highlighting its own desire to find a compromise arrangement, saying “positive progress” has been made in talks, but reiterating its opposition to what it called “politicising securities regulation”. The news in mid-week that some sort of rapprochement may be on the cards appears to have drawn a line under the worst of the downward slide in share prices, at least for the moment (explaining some of the recovery in Yum China’s stock). Perhaps the Chinese are also viewing the new situation in the light of the more coordinated response from countries in Europe and North America to the situation in the Ukraine than Beijing had perhaps expected. That outcome seems to show that governments are prepared to withstand some economic pain in pursuit of other principle-driven policy goals.
This week the Chinese Securities Regulatory Commission (CSRC) has made noises about its desire to find a solution to the row, with the Financial Times reporting on Wednesday on some kind of ‘traffic light’ system for companies that gives more guidance about the information they are allowed to disclose.
There remain sticking points, which should probably temper some of the optimism markets derived from more conciliatory headlines in mid-week.
That’s because the current US policy goes well beyond creating a level playing field in terms of full and fair access to financial data – the original remit of the PCAOB, which was set up as a bulwark against fraud after a series of domestic accounting scandals, most notably Enron’s.
The HFCA Act does much more than this, stipulating that US-listed companies must identify shares owned by Chinese government entities and the names of Communist Party officials sitting on the board of directors or on any related operating entity or even the controlling variable-interest entity (VIE).
So far, the biggest beneficiary of the tougher line on such disclosures from American regulators has been Hong Kong. A stream of Chinese companies unsure about their futures in the US have been hedging their bets by setting up secondary listings on the city’s exchange. The new arrivals have helped to push Hong Kong’s combined market capitalisation this month to $5.5 trillion, putting it fourth globally behind Japan.
Singapore is also trying to tempt Chinese companies looking for another international home. The city is already an active early-stage financing hub for tech start-ups and building more exchange-traded business in the tech sector would be an obvious move.
One of those might be Chinese electric vehicle start-up, NIO, which has applied for a secondary listing in Singapore. It has just made its first move to diversify away from New York after completing a listing by introduction (in which no new funds are raised, meaning lower fees for the bankers that arrange it) in Hong Kong.
Amid all the uncertainty about the American bourses, other companies from China seem set to head for Hong Kong. Capital raising in general is more cost-competitive in Asia too. A standard Hong Kong IPO typically commands fees of 1.5% to 2%, much lower than the 4% to 5% charge that Wall Street bankers have enjoyed for decades.
Fees are even less when the listing is an introductory one. Take NIO as an example: when it completed a $1 billion NYSE IPO in 2018, it paid its investment bankers fees of $40 million, according to S&P Global Market Intelligence data. But it paid its three leads just $500,000 each for its introductory listing on the Hong Kong exchange this month, it was reported.
In preparation for their departures from New York, other Chinese companies have announced plans for listings by introduction as well. They include: video platform iQiyi, online broker Futu Holdings, employment portal Kanzhun, budget retail chain Miniso, community platform Zhihu and Hello Group, which operates the Momo social network.
Didi Global had also hoped to secure a listing by introduction in Hong Kong but it was forced to scrap the plan last week, reportedly because its latest proposals to shore up its data protection capabilities fell short of regulatory requirements.
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