Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Analysis-China investors hedge U.S. delisting risk with Hong Kong play

Stock Markets Aug 10, 2022 03:57PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: A floor trader walks during afternoon trading at the Hong Kong Stock Exchange in Hong Kong, China September 26, 2016. Picture taken September 26, 2016. REUTERS/Bobby Yip
 
BABA
+0.33%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
YUMC
+1.26%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By Samuel Shen and Xie Yu

SHANGHAI/HONG KONG (Reuters) - Global fund managers holding U.S.-listed Chinese stocks are steadily shifting towards their Hong Kong-traded peers, even as they remain hopeful Beijing and Washington will eventually resolve an audit dispute to keep Chinese firms on American exchanges.

The pace of migration will likely accelerate, as more Chinese firms listed in New York are expected to follow technology giant Alibaba (NYSE:BABA)'s intent to launch so-called primary listings in Hong Kong, potentially boosting liquidity there to smooth the transition.

KraneShares CSI China Internet ETF (KWEB), a New York-listed fund focused on Chinese tech plays, started swapping American Deposit Receipts (ADRs) into Hong Kong shares in December, when U.S. securities regulators finalised rules to prohibit trading of Chinese companies not compliant with U.S. audit rules.

Under the U.S. rules, Chinese ADRs will be ejected from exchanges in early 2024 if U.S. regulators cannot have complete and timely access to the Chinese companies' audit working papers - a request so far denied by Beijing on national security grounds.

Hong Kong-traded stocks account for more than 70% of KWEB's portfolio, latest data shows, compared with just 25% in March 2021. By the end of this year, the fund aims to be fully invested in Hong Kong shares.

"It behooves both sides to resolve this issue as there's no winner in a delisting scenario," said Brendan Ahern, CIO of Krane Funds Advisors, which manages the fund.

But under fiduciary duty to protect investors' money, "you're going to take the more conservative path."

Ahern hailed Alibaba's plan to upgrade its secondary listing in Hong Kong to a primary listing, saying such a move "allows companies to have their cake and eat it too."

LIQUIDITY PRESSURE

Still, Hong Kong is a relatively small and retail-driven market compared to the U.S., and it might face pressure to offer liquidity support if delisting kicks in, said Jon Withaar, head of Asia Special Situations Equities at Pictet Asset Management.

"You have so many companies that are Chinese ADRs that will need to come back home. This is almost a trillion dollars, on top of a lot of companies in the private space looking to become public," he said.

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

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

Jon said he owns both Chinese ADRs and Hong Kong shares in his portfolio due to the delisting uncertainty.

The U.S. market offers better liquidity but trading hours in Hong Kong are easier to manage, the Singapore-based manager said.

Alibaba will likely trigger "a wave" of primary listings in the next 12 months, potentially boosting average daily turnover in those stocks by 50% once they are included in the Stock Connect, Citic Securities estimates.

PRUDENT STEP

Thomas Masi, co-portfolio manager of the GW&K Emerging Wealth Strategy, which is heavily exposed to China, has already moved holdings in companies such as Alibaba from New York to Hong Kong, but hasn't yet swapped out of ADRs in Trip.com and Yum China Holdings (NYSE:YUMC).

"We only have three Chinese holdings where we own the ADR ... because the liquidity is overwhelmingly concentrated in the ADR form," said Nuno Fernandes, GW&K's partner and portfolio manager, adding a shift will take place once liquidity in Hong Kong becomes sufficient.

But he still believes that the vast majority of Chinese ADRS will be maintained: "This does not have to be a zero sum game, Hong Kong or New York."

Beijing in late May said both sides are committed to reaching a resolution, but Washington has been more cautious on the outlook.

"Our base case is that authorities come to a resolution on U.S. listings and the status quo of over two decades remains," said Thomas Hayes, chairman and managing member of Great Hill Capital, a New York-based hedge fund. However, he has also shifted 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 believe that it is very unlikely that China and the U.S. cannot come to a resolution and Alibaba will not get delisted. Regardless, this has become a narrative that is dragging the stock down," Coons said.

Analysis-China investors hedge U.S. delisting risk with Hong Kong play
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email