Analysis-China Investors Hedge U.S. Delisting Risk With Hong Kong Play

By Samuel Shen and Xie Yu

SHANGHAI/HONG KONG (Reuters) – Global fund managers with U.S.-listed Chinese stocks are gradually turning to their Hong Kong-traded counterparts, though they hope Beijing and Washington will eventually resolve an audit dispute to keep Chinese companies on US stock exchanges.

The pace of migration is likely to pick up as more Chinese companies listed in New York are expected to follow tech giant Alibaba’s plans to launch so-called primary listings in Hong Kong, which could increase liquidity there for facilitate the transition.

KraneShares CSI China Internet ETF (KWEB), a New York-listed fund focused on Chinese technology players, began trading US deposit receipts (ADRs) for Hong Kong stocks in December, when US securities regulators Securities finalized rules prohibiting trading of non-compliant Chinese companies. with US auditing rules.

Under US rules, Chinese ADRs will be thrown off exchanges in early 2024 if US regulators cannot get full and timely access to Chinese companies’ audit working papers – a request so far denied by Beijing. for reasons of national security.

Stocks traded in Hong Kong make up more than 70% of KWEB’s portfolio, according to the latest data, up from just 25% in March 2021. By the end of this year, the fund aims to be fully invested in Hong Kong stocks. Kong.

“It is up to both parties to resolve this issue because there is no winner in a delisting scenario,” said Brendan Ahern, CIO of Krane Funds Advisors, which manages the fund.

But under the fiduciary duty to protect investors’ money, “you’re going to go the more conservative route.”

Ahern welcomed Alibaba’s plan to upgrade its secondary listing in Hong Kong to the primary listing, saying such a move “allows businesses to have their cake and eat it too.”

Still, Hong Kong is a relatively small, retail-focused market compared to the United States, and it could face pressure to offer liquidity support if the delisting takes effect, Jon Withaar said. , Head of Asia Special Situations Equities at Pictet Asset Management.

“You have so many companies that are Chinese ADRs that will have to go home. That’s almost a trillion dollars, in addition to many private sector companies looking to go public,” he said.

A primary listing would allow the stock to be included in the China-Hong Kong Stock Connect, making the stock eligible for mainland investment and potentially increasing trading volumes, but nothing close to the depth of US markets.

Equity trading turnover on the New York Stock Exchange and Nasdaq was each about seven times that of the Hong Kong stock exchange in 2021, according to the World Federation of Exchanges.

Jon said he had both Chinese ADRs and Hong Kong stocks in his portfolio due to the uncertainty surrounding the delisting.

The US market offers better liquidity but trading hours in Hong Kong are more manageable, the Singapore-based manager said.

Alibaba will likely trigger “a wave” of primary listings over the next 12 months, potentially increasing the average daily turnover of these stocks by 50% once they are included in Stock Connect, according to Citic Securities estimates. .

Thomas Masi, co-portfolio manager of the GW&K Emerging Wealth strategy, which is heavily exposed to China, has already transferred stakes in companies such as Alibaba from New York to Hong Kong, but has not yet exchanged the ADR on and Yum China Holdings.

“We only have three Chinese holdings in which we hold ADR…because liquidity is extremely concentrated in the ADR form,” said Nuno Fernandes, partner and portfolio manager at GW&K, adding that a change will take place. once liquidity in Hong Kong becomes sufficient. .

But he still believes the vast majority of China’s ADRS will stand: “It doesn’t have to be a zero-sum game, Hong Kong or New York.”

Beijing said in late May that both sides were determined to reach a resolution, but Washington has been more cautious about the outlook.

“Our base case is that the authorities reach a resolution on U.S. listings and the status quo of more than two decades remains,” said Thomas Hayes, chairman and managing member of Great Hill Capital, a New York-based hedge fund. . However, he also moved his holdings to Hong Kong where possible.

Some fund managers say they will stick to ADRs.

“We still own Alibaba and Tencent ADRs,” said Adam Coons, portfolio manager at Winthrop Capital Management.

“We still think it’s highly unlikely that China and the United States won’t reach a resolution and that Alibaba won’t be delisted. Either way, it’s become a story that drives down the stock,” Coons said.

(Reporting by Samuel Shen and Xie Yu; Editing by Vidya Ranganathan & Shri Navaratnam)

Copyright 2022 Thomson Reuters.

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