Risks of U.S. Listings by China’s Companies
In parallel Alibaba began to lose its premium compared to the performance of U.S. shares. Between its September IPO and the first weeks in November Alibaba shares had risen by 27 percent compared to a one percent rise for the S&P 500 – a 26 percentage point Alibaba premium. But by the beginning of December Alibaba had fallen to only 12 percent above its first day price compared to a three percent S&P 500 rise in the same period – only a nine percent premium, with a clear downward direction.
Future pressure that can be put on Alibaba by U.S. authorities is evident – including potentially by regulatory probes. If Alibaba does not go along with U.S. government demands actions can be taken limiting its U.S. expansion. Such threats can make Alibaba an instrument of pressure on China as the company tries to prevent such measures.
In the author’s judgement, regarding the immediate situation, Hong Kong made a serious mistake in not accepting Alibaba’s proposed share structure. As the company was not asking for a state subsidy, and nothing relevant was hidden, private shareholders should have been left to decide if they wanted to invest given its proposed share structure.
More fundamentally the risks of having a country’s major companies listed on share markets outside its own directly regulated territory are insurmountable – the good reason why the largest economies have their companies listed in their own jurisdictions. A country’s largest companies are important national assets. Ability to regulate these companies is a key feature of national policy. The bases for significant clashes if companies are listed outside a major country’s jurisdiction are inevitable given differing structures of different countries and can become conscious policy matters.
Objective structural issues were illustrated in the China-U.S. auditing dispute. In January 2014 an SEC judge ruled the Chinese branches of main Western auditing firms should be suspended for six months. Even if this immediate issue is solved, the clash of regulatory regimes is inevitable. The Financial Times drew attention to the risk: “Because of restrictions on foreign investment in the Chinese Internet sector, China’s tech companies have listed in the U.S. as ‘variable interest entities.’ U.S. shareholders are tied to these companies through contractual obligations… rather than as their actual owners. This has been a clever structure for working around China’s rules. Yet it is also one that can crumble apart under pressure, whether because a Chinese company chooses to ignore the agreement or because the Chinese regulator decides it has had enough of the ruse.”
In addition to inevitable regulatory issues the possibility for direct political pressure exists – as seen with Huawei and ZTE, and as has begun with Alibaba. This occurred when relations between the U.S. and China were not extremely tense. But if there were major tension between the two countries, the temptation of U.S. authorities to put pressure on Chinese companies listed in the U.S. would almost certainly be irresistible.
The conclusion is evident. It does not matter if second- or third-rank Chinese companies list in the U.S., they must simply comply with U.S. regulation whether or not they agree with it. But for the same reasons that almost all first-tier U.S. companies are listed in the U.S., the most important Chinese companies should be listed in China. The wild up-and-down roller coaster seen in the last period, plus the structural features, shows that while short-term measures can be taken the risks of having first-rank Chinese companies listed in the U.S. cannot in fact be controlled in the long run.
John Ross is a senior research fellow at Chongyang Institute for Financial Studies, Renmin University of China. From 2000 to 2008 he was director of economic and business policy in the administration of Mayor of London Ken Livingstone. He previously served as adviser to several major international mining, finance and equipment manufacturing companies.
