China recently stunned markets with a proposal to allow audits of companies listed abroad. Market expert Qi Wang provides his take in an interview with finews.asia.
The China Securities Regulatory Commission (CSRC) announced earlier this month that it was soliciting comments on planned listing requirement changes for domestic companies, as finews.asia previously reported.
The most far-reaching change for overseas investors in the wide-ranging proposal is in article 11, as it will give foreign authorities and auditors the ability to review, audit, and inspect Chinese companies listed abroad, something that had been contested for years, particularly by U.S. securities regulators.
Finews.asia recently talked about the step with Qi Wang, the co-founder, and chief investment officer of MegaTrust Investments (HK), a research-driven, boutique fund manager specializing in Chinese equities for global institutionals.
Mr. Wang: many are characterizing the recent step by the CSRC and other government authorities as an unusual reversal by Beijing. Do you think that?
From my point of view, it’s not. I have been saying since last December that there was hope for a reconciliation of the audit rules. I expected it even before the whole crackdown on tech. Back then, I did say that American Depository Receipts (ADRs) were facing regulatory pressure from both countries.
What do you think they are trying to do?
This move confirms my thinking that China is proactively trying to reconcile the differences out there and increase cooperation with international regulators. Although the proposal doesn’t mention ADRs specifically, that is what it is mainly aimed at. It also doesn’t mention the U.S. Congress or the PCAOB (Public Company Accounting Oversight Board) but it is essentially written for them.
What about the proposed coordination mechanism allowing audits of Chinese companies overseas?
It is fundamentally a good thing, and it is consistent with what I have been saying. China is still hopeful for more economic cooperation with the U.S. - as there is no inherent economic or financial conflict between the two countries. The story is different geopolitically, and ideologically.
«It is good that both China and the U.S. want to drain the swamp.»
But the success of Chinese ADRs is about giving investors a stake in a company doing business in the largest and fastest-growing country in the world, (China) and at the same time listed in the world’s largest and best capital market (U.S.). You get liquidity, investors, and branding. It is the best of both worlds. But now we have the worst of both worlds (for the ADRs).
Do you see it being implemented quickly?
Yes. Even though we are now going through a period of consultation, I think it will be in place in six to eight months. It is unlikely to change substantially, and I do not expect too many surprises. There are at least three government bodies involved including the CSRC. That is why it took so long and why it may take some time to implement.
Do you think the U.S. ADR market for Chinese companies will come back?
New listings will come back but there won’t be as many as before. I think the total number of listings will also go down. There are about 240 Chinese ADRs today and probably half of them won’t be able to make it. Some of them are very sketchy and no one knows what they do in China. The increasing regulatory scrutiny will likely screen out the bad apples. It is good that both China and the U.S. want to drain the swamp. IPOs will continue but the pace will be significantly slower. The regulatory cost (for ADRs) used to be almost zero and it was easier to list in the U.S. than it was in Hong Kong or China. But it should not be that easy. It was too easy and there wasn’t enough gatekeeping. With this, we would be applying the same regulatory requirements and costs to all. And the small, weak companies may not be able to bear it. The strong companies will get stronger.
How should wealth management clients take this?
I think the larger picture is that people need to have more optimism. The ADR story is not over. The China investment story is also not over. Many lost hope after last year’s regulatory crackdown and there was a great deal of confusion and speculation on why China wanted to do things in a certain way. The Didi case is a perfect example of the speculation we were seeing with things out there like China wanting to stop all overseas IPOs. That was never true, and China clarified recently which sectors and companies specifically need the approval to go abroad. Another was that China wanted to nationalize all internet companies, which is also not true. There was so much unfounded speculation that ignored the big picture. China and the US are not in a fundamental economic conflict and China wants to keep opening further. China also wants to harness the power of its internet giants to become a stronger country. It is doing so for its own good. Keeping ADR listings will help the Chinese internet leaders become truly global players. A US listing is still symbolic and helps reinforce your image or status as a global player.
«If I have a really good business, why do I have to worry about whether or where the company can be listed?»
If you are a private banker, I think you need to discuss with your clients what China’s real interests are here. And like I said, it’s in China’s best interest to have a stronger internet sector and keep the companies listed in the U.S. The general advice should be that the ADR market will still offer certain benefits to companies and investors. It is still a relatively easy market to access, as trading US stocks is not difficult when compared with China. I wouldn’t lose hope in the market as it is still good for gaining certain exposure to China, such as through the internet.
What if the market doesn’t come back? What other options are out there for Chinese companies looking for equity funding overseas?
Around 20 of the 240 companies with ADRs already have secondary or primary dual listings in Hong Kong. So that problem is already solved. And there are another 80 companies that are eligible to be listed in Hong Kong immediately. So back to your question, Hong Kong is the best answer.
Why haven’t they already?
It’s a good question. I think there may be a cost issue. The cost is not just in the form of money, but the time and energy needed to complete a successful Hong Kong listing. The same time and energy may be best spent elsewhere. So, from a company’s standpoint, do I work on keeping the U.S. listing, embark on a Hong Kong listing, or wait and see and focus on growing the business instead. If I have a really good business, why do I have to worry about whether or where the company can be listed?
Why not the Swiss market?
It is probably not about the cost of going public there or the specific location but more related to venture capital and private equity money already in these companies. They are usually US dollar funds, and they want the exit in dollars. Many of the China VC funds are US dollar funds. They can, at best, exit in Hong Kong where the Hong Kong dollar is pegged to the U.S. dollar. Euros and Swiss francs are a different story entirely.
Most of the articles in the proposal seem to deal with the handling of state secrets by Chinese companies and the proposed requirements seem broad. How would you characterize them?
It is widely worded and maybe intentionally vague. They always leave an open door. The law can be very open-ended and very broad. It is less about the granularity of the law and more about the spirit of the law and the enforcement mechanism. Remember some of these Big Tech internet companies are quite adept at dealing with the Chinese government, especially after the recent round of regulatory crackdowns. So, I think they (the industry leaders) can handle this.
Qi Wang, a self-described Wall Street veteran, was born and raised in Shanghai. He attended college in the U.S. graduating with a math and computer science degree from Colby College and an engineering degree from Dartmouth. His first job was at Goldman Sachs in New York. He followed that with stints as an investment director at Elliot Advisors in Hong Kong and as a global tech strategist at UBS in Hong Kong and New York. He subsequently managed money for China Everbright Limited (a state-owned company) overseeing its $1 billion US dollar public investment department. Afterward, he joined MSCI, where he led research into the inclusion of A-shares before co-founding MegaTrust Investments. He is the author of the subscription-based financial newsletter called «Qi Wang's Daily Reflection on China».
