What the Delisting of Chinese ADRs Means for Investors
04 Gennaio 2021 - 2:54PM
Dow Jones News
By Chong Koh Ping
In the coming days, the New York Stock Exchange will start to
delist American depositary receipts in China's three big
telecommunications operators. Here are some of the key questions
this raises for investors.
What does delisting mean?
Delisting means shares are removed from a stock exchange and
investors can no longer buy or sell them there. A delisting can be
voluntary or involuntary. For example, in 2019 China's
Semiconductor Manufacturing International Corp., a big chip maker
whose shares mostly traded in Hong Kong, scrapped its less-active
listing on the NYSE. Conversely, last year the Nasdaq Stock Market
forced China's Luckin Coffee Inc. to delist after an accounting
scandal.
In this case, the NYSE will delist ADRs from China Mobile Ltd.,
China Telecom Corp. and China Unicom (Hong Kong) Ltd. against the
companies' wishes.
What are Chinese ADRs?
ADR stands for American depositary receipt. These securities are
effectively a way for U.S. investors to buy stakes in foreign
companies, without the complexity of buying shares overseas. A bank
or broker holds underlying stock in a company, and issues ADRs
backed by those shares.
Some, but not all, ADR issuers publish annual reports and other
financial statements in the U.S., and some who meet stringent
requirements are able to raise funds from U.S. investors. Other
issuers follow less onerous rules and their securities only trade
privately in the over-the-counter markets.
Chinese ADRs are an important part of the U.S. stock market,
thanks to their use by major companies such as Alibaba Group
Holding Ltd.
Why is the NYSE delisting some Chinese companies?
To comply with a November executive order by President Trump.
This bars Americans from investing in companies that the U.S.
government says help China's military, intelligence and security
services, as well as in linked financial products.
The ban starts Jan. 11 and investors have until November to shed
their holdings. The current blacklist covers 35 companies, not all
of which are listed on stock exchanges, but the Treasury Department
plans to expand it to include listed subsidiaries.
What happens to the value of delisted ADRs? Are they
worthless?
The receipts won't be worthless -- effectively they still
represent an economic interest in the company. Holders could still
collect dividends, for example. But only non-American entities will
want to buy the ADRs, which is likely to reduce their value, and
they could become difficult to trade and to value.
What can investors do when a stock is going to be delisted?
Investors in the Chinese telecom carriers can sell their ADRs on
NYSE before they are delisted or convert them to the Hong
Kong-listed ordinary shares. But the U.S. ban also prohibits
American investors from buying securities that trade on any
exchange anywhere, or even just over-the-counter, so switching into
Hong Kong shares might only buy a few months' respite.
What happens if investors don't trade in their ADRs?
There is no requirement to sell until November, so investors
could hold on until then. In addition, Nicholas Turner, a lawyer at
Steptoe & Johnson LLP in Hong Kong, said the Treasury
Department was unlikely to focus on individual investors who
inadvertently bought into targeted companies. "Assuming that most
financial institutions will follow the rules, most U.S. retail
investors will simply lose access to opportunities to purchase the
securities," he said.
Institutions that buy blacklisted stocks after Jan. 11 could be
penalized. Mr. Turner said the International Emergency Economic
Powers Act allows the Treasury to levy fines of more than $307,000
for each violation or twice the value of a transaction, though it
often cuts penalties if companies cooperate and make efforts to fix
compliance failings.
Will more Chinese companies get delisted?
Possibly. As well as the three telecom operators, China National
Offshore Oil Corp., one of China's major oil companies, also has
NYSE-listed ADRs.
A separate dispute over accounting could also fuel further
delistings. In December, Mr. Trump signed legislation that could
have Chinese companies kicked off U.S. markets if American
regulators can't inspect their audits within three years.
Since late 2019, Alibaba and several other Chinese groups have
obtained secondary listings in Hong Kong. This would mean they
retain access to international capital markets even if their shares
are eventually delisted in America.
Write to Chong Koh Ping at chong.kohping@wsj.com
(END) Dow Jones Newswires
January 04, 2021 08:39 ET (13:39 GMT)
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