Baidu and Futu Securities have been added to the list of delisted, how to solve the crisis of Chinese stocks?

The factors affecting the decline in Chinese stocks in this round are complex and multifaceted, and the trend of Sino-US relations and whether the geopolitical conflict has eased are one of the important factors

Text | Zhang Xinpei, Wang Ying, Yang Xiuhong

Edit | Wang Lifeng Lu Ling

On March 30, local time, the US Securities and Exchange Commission (SEC) announced that baidu, Futu Holdings, iQiyi, Nocera and Kaixin Yuanda Pharmaceutical five Chinese-listed companies will be added to the provisional list of possible delisting.

Together with the previous six, as of now, a total of 11 Chinese-listed companies are at risk of being delisted or delisted. The SEC published the list based on the implementation rules of the Foreign Companies Accountability Act issued on December 3, 2021, and Chinese stocks that do not meet the conditions will be delisted from the U.S. stock market within three years.

Affected by the news, Baidu, Futu Holdings, etc. have all experienced certain declines. In fact, when the first list of to be extracted was announced, due to the fear that more Chinese-listed companies would be added to the list, some funds had already begun to withdraw, and Chinese-listed stocks fell one after another.

The outside world believes that the key to resolving the crisis of The Chinese stock market lies in whether China and the United States can reach a solution, and the focus is on whether the audit working papers of the Chinese stock companies can be inspected by overseas regulators.

The China Securities Regulatory Commission is taking active action. On March 31, after the US SEC published the third batch of lists, the China Securities Regulatory Commission then publicly responded, "For some enterprises that are included in the list of delisting risks by the SEC, after understanding with the US SEC, this is a normal procedure for the US regulatory authorities to implement the Foreign Company Accountability Act, and whether the listed companies will be truly delisted in the next two years ultimately depends on the progress and results of Sino-US audit and regulatory cooperation." ”

The CSRC also said that since August last year, CSRC Chairman Yi Huiman and SEC Gensler Chairman have held three video conferences to discuss resolving the remaining issues in Sino-US audit regulatory cooperation. The Chinese side and the U.S. Public Corporation Accounting Oversight Committee (PCAOB) have held several rounds of frank, professional and efficient talks, and the overall progress is smooth, and communication between the two sides will continue. Both sides are willing to resolve differences and problems, and the final result depends on the wisdom and original intention of both sides.

According to reports, on March 27, some companies and investment institutions participated in a video exchange held by the China Securities Regulatory Commission, which mainly listened to the opinions of market participants on the recent situation of Chinese stocks. Although the CSRC did not disclose the details of the negotiations with the US regulators, it said that both sides have demonstrated a positive willingness and pragmatic attitude to solve the problem, and have continued to conduct efficient, frank and professional consultations in recent times. This is consistent with the information recently disclosed by the US side.

Earlier, the relevant person in charge of the CSRC said that in recent times, the CSRC and the Treasury Department have continued to communicate and dialogue with the US Public Company Accounting Supervision Committee (PCAOB) and have made positive progress.

Subsequently, U.S. regulators also responded. On March 15, the PCAOB said that the committee was in active communication with Chinese regulators and had recently held several talks to reach a cooperation agreement. PCAOB also said it is willing to maintain cooperative relations with Chinese government departments.

The statements of the two sides have released a signal of cooperation to the outside world. Subsequently, on March 16, the Financial Stability and Development Committee of the State Council (hereinafter referred to as the "Financial Commission of the State Council") held a special meeting to study the current economic situation and capital market issues. It is clear that it is necessary to maintain the long-term trend of the healthy development of China's economy and jointly maintain the stable development of the capital market. Regarding the China Stock Exchange, the regulators of China and the United States have maintained good communication, made positive progress, and are working to form a specific cooperation plan.

Market sentiment eased shortly, but concerns about Chinese stocks did not recede.

Under the crisis, companies are also acting.

Earlier, a number of U.S. and Chinese stocks have returned to Hong Kong for secondary listing, such as Alibaba, etc., at the same time, a number of Chinese stock companies have recently released stock repurchase plans, of which Alibaba's $25 billion stock repurchase plan is "epic", becoming the highest repurchase plan in the history of Chinese stocks.

"The factors affecting the decline of Chinese stocks in this round are complex and multifaceted, and the trend of Sino-US relations and whether the geopolitical conflict is eased are the most important, so it is not easy to judge the future direction of Chinese stocks." Industry insiders said.

Deep in crisis

The Crisis began about two years ago. In April 2020, luckin coffee's financial fraud incident seriously hit the trust of foreign investors in Chinese stocks. Subsequently, a number of Chinese stocks were hunted by the bears, and the stock price plummeted.

Wave after wave of unevenness rises again. On July 2, 2021, only three trading days after its listing in the United States, Didi Chuxing, a large unicorn that gathered all kinds of capital, underwent a network security review. Soon, the "double reduction" policy of education was introduced. At that time, the Chinese stocks were adjusted again.

On March 8 this year, under the Foreign Company Accountability Act, the U.S. Securities and Exchange Commission (SEC) added five Chinese companies to the provisional list of the Foreign Company Accountability Act, and five companies are at risk of delisting. As Weibo becomes the sixth pre-delisted company, there are concerns that more Chinese-listed companies may be added to the delisting list.

In three consecutive trading days beginning on March 10, the Nasdaq Golden Dragon Index fell by more than 10%. Wind data shows that as of March 31, only 45 of the Chinese stocks listed on the NASDAQ have risen and 143 have fallen so far this year, of which 23 stocks have fallen by more than 50%. Daily Fresh fell 74.45%, Bilibili fell 39.18%, and Pinduoduo fell 24.94%.

In fact, in 2011, Chinese companies encountered a serious crisis of trust. The last round of crisis also began with the fraudulent listing of enterprises. Later, through the investigation of a number of Chinese stock companies, the SEC found many problems such as financial fraud and investor fraud. This has sparked a strong distrust of Chinese stocks on Wall Street. Subsequently, Chinese companies fell, and the listing in the United States almost pressed the pause button.

The issue of audit papers of Chinese-listed enterprises has become a point of contention. In May 2013, after several rounds of maneuvering and efforts between China and the United States, the China Securities Regulatory Commission, the Ministry of Finance and the PCAOB signed a memorandum of understanding to temporarily ease the contradictions. Since then, the number of Chinese-listed enterprises has gradually increased.

"The occurrence of the last round of crisis was mainly caused by the fraud of Chinese stocks, and the factors affecting the current round of crisis are more complex." Chen Da, executive director of Hehe Capital (Hong Kong), told Caijing reporters. The comparison between the two rounds of The Chinese stock crisis has similarities, and both rounds of crises have their own problems and external environment. It is worth noting that when the two rounds of Sino-AMERICAN stock crises occurred, the relationship between China and the United States has always been relatively tense.

Although this round of crisis is also caused by counterfeiting incidents, as the events continue to ferment, the reasons are more complex, ranging from Sino-US competitive factors to geopolitical conflicts.

Under the geopolitical conflict, the outside world is worried that the relationship between China and the United States has become more tense, which has also led to some funds fleeing Chinese companies at any cost. Chen Da said. The flight of funds in exceptional circumstances has caused an irrational decline, which has nothing to do with corporate fundamentals.

"In the case that foreign funds can't understand the prospects of Chinese stocks, the decline in this position, after reaching a certain turning point, it is difficult to have a possibility of a large increase in positions, because the return on your investment is not proportional to the risk." Coupled with the good dollar assets, the Fed began to raise interest rates, everyone will be more inclined to buy dollar assets, so it is possible to withdraw from rmb assets. Pang Min, chief economist and chief strategist of Huaxing Securities (Hong Kong), told Caijing reporters.

Regulatory challenges

The Foreign Company Accountability Law is an important issue facing China stocks. The last round of the China stock crisis came to an end due to the signing of a memorandum of understanding between the China Securities Regulatory Commission, the Ministry of Finance and the PCAOB. However, this move is only suspended, and the contradictions between the two sides have not been resolved. In 2020, the passage of the Foreign Company Accountability Law can be seen as a re-energization of contradictions.

Later, in December 2021, the SEC published the relevant rules of the accountability act. The SEC reserves the right to delist foreign companies listed in the U.S. if they fail to file a report that satisfies PCAOB requirements for three consecutive years. This means that starting from the disclosure of the 2021 annual report, after the disclosure of the 2023 annual report, that is, in early 2024, the Chinese stock will face the risk of delisting.

In June 2021, the U.S. Senate passed a draft of the Accelerated Accountability Of Foreign Companies Act, which shortens the review time from three years to two years. However, the draft is not yet on the agenda of the House of Representatives.

Tian Xuan, deputy dean of Tsinghua University's Wudaokou School of Finance, pointed out that the direct reason for the long-term decline in Chinese stocks comes from the gradual clarification of the details of the Foreign Company Accountability Law in the United States. The deep-seated reason is actually the current regulatory conflict under the Sino-US relationship.

For Chinese-listed enterprises, the core issue is whether to hand over the audit working papers. In fact, the audit working paper is not a document, but an umbrella term for a series of documents, containing core data related to the company's operations, such as customer lists, user information, bank statements, sales contracts, and so on.

In this case, cross-border regulation must have many sensitivities. In China's new Securities Law, it is clearly stated that overseas securities regulatory authorities shall not directly conduct investigation and evidence collection activities in China, and without the consent of the CSRC and relevant competent departments, no unit or individual may provide documents and materials related to securities business activities abroad without authorization.

In a sense, there are obvious conflicts in the system between China and the United States, so whether to transfer the audit working papers is not decided by the enterprise, but by the regulators, and whether the Chinese and US regulators can reach a consensus on cross-border audits is the key to solving the problem.

After the last round of the China stock crisis, China and the United States signed a memorandum of cooperation, requiring both sides to provide and exchange a framework agreement on audit documents related to the investigation in their respective jurisdictions, and suspending the contradictions. However, in the process after that, the actual landing of law enforcement cooperation did not go smoothly.

However, the CSRC has been actively seeking cooperation with the US PCAOB.

At the beginning of 2020, the CSRC said that under the framework of cooperation such as the Multilateral Memorandum of understanding of the International Organization of Securities Regulatory Commissions (IOSCO), the CSRC has provided 23 overseas listed companies with audit working papers to a number of overseas regulators, including 14 to the US Securities and Exchange Commission and the US PCAOB.

"The CSRC believes that PCAOB's demand is completely reasonable, since Chinese companies are listed in the United States, they must abide by the rules of the United States, but PCAOB inspection of Chinese accounting firms also needs to comply with China's rules and comply with China's national security and information security requirements." In the past four or five years, the two sides have made great progress in joint exploration, but after the change in the us political atmosphere, Sino-US cooperation has declined. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, has said to the outside world.

As for how the Two Sides can reach cooperation in the differences between China and the United States, Pang Min told the Caijing reporter: "I can only say cautious optimism. The CSRC is only the lead party, and then it needs the cooperation of the Ministry of Finance. Even if the agreement is signed, there is still uncertainty about how the SEC will connect with PCAOB in the future. ”

Pang Min believes that for Chinese stocks, the main risks will be narrowed to whether the two sides can form a cooperation plan as expected, whether the cooperation plan can be implemented, and whether the implementation will be affected by the domestic political trend and legislative branches in the United States.

The CSRC has also spoken out on many occasions, expressing its support for eligible enterprises to list overseas, and also welcomes overseas issuers to apply for listing on the Shanghai and Shenzhen Stock Exchanges of China Depositary Receipts to deepen the interconnection of domestic and foreign markets.

Recently, the CSRC issued a no-objection reply to Zhen Kunxing and other companies that intend to list in the United States. Industry insiders believe that this shows that the regulatory authorities actively implement the spirit of the March 16 meeting of the Financial Commission and strive to keep the overseas listing channels open.

In December last year, the China Securities Regulatory Commission (CSRC) promulgated the Provisions of the State Council on the Administration of Securities Issuance and Listing by Domestic Enterprises Abroad (Draft for Solicitation of Comments) and the Administrative Measures for the Filing of Securities Issued overseas by Domestic Enterprises (Draft for Solicitation of Comments) to solicit public opinions. On 25 March, the Shanghai Stock Exchange issued the Interim Measures for the Listing and Trading of Depositary Receipts Interconnected by the Shanghai Stock Exchange and Overseas Stock Exchanges. On the same day, the Shenzhen Stock Exchange also issued corresponding documents.

Where is the road?

The Crisis in Chinese Stocks that has erupted since March has caused the cumulative market value of US stocks to evaporate by more than 2 trillion yuan. Internet giants such as Tencent and Ali are facing short selling by Wall Street investment banks, and many Chinese stocks have experienced ups and downs.

Under the crisis, the future direction and way out of Chinese stocks have become the focus of attention of all parties.

Tian Xuan believes that there are basically three directions that Chinese stocks can choose in the future: one is to accept the regulatory requirements of the SEC, cooperate with the review, and seek a moderate and compromise solution under the negotiations between China and the United States; the second is to double list or secondary listing on other exchanges; and the third is delisting and privatization.

Tian Xuan's mention of the way out of Chinese stocks has become the general consensus in the industry. Research reports released by a number of institutions have also put forward similar views.

Among the above three options, the secondary listing of Hong Kong has become the choice of many Chinese stocks listed in the United States.

As early as 2018, the Hong Kong Stock Exchange relaxed the rules to allow the Chinese shares of innovative enterprises to be listed in Hong Kong for the second time. The condition is that the issuer is an innovative enterprise and meets the market capitalisation of at least HK$40 billion at the time of listing, or a market capitalisation of at least HK$10 billion at the time of listing and a gain of at least HK$1 billion in the most recent audited fiscal year.

Since then, the Hong Kong Stock Exchange has continued to relax the secondary listing conditions. In April 2021, the Hong Kong Stock Exchange again relaxed the relevant listing conditions, including the removal of the qualification restrictions for "innovative enterprises", allowing the return of Chinese stocks operating traditional industries without different voting rights structures, and lowering the value threshold of Chinese stock markets that intend to be listed for a second time.

Attracted by the easing policies of the Hong Kong Stock Exchange, 20 US-listed Chinese stocks have returned to HKEX so far, including 16 secondary listed enterprises and 4 dual-listed companies. The companies listed for the second time include Alibaba, JD Group, NetEase, Weilai, etc.; the dual listed companies include Xiaopeng Automobile and Ideal Automobile.

There are some differences between secondary listings and double listings. Zhongtai Securities believes that the most ideal way to return to the US-China stock market is to return first, convert as many US stocks as possible into Hong Kong stocks, and then apply for the "secondary listing" to be converted into a "double listing", so that it can retain its legal listing status in Hong Kong stocks after the delisting of Chinese stocks, and can also transfer most of the shares from US stocks to Hong Kong stocks to avoid financial pressures brought about by privatization.

At the same time, Hong Kong, China, also provides a new channel for Chinese stocks to list in Hong Kong, namely the listing mechanism of SPAC (Special Purpose Acquisition Company).

Compared with traditional IPOs, SPAC is faster to list, and for some companies, listing through SPAC is more certain, the fundraising process is simple, the financing efficiency is high, and the exit of shareholders is more convenient.

"There has always been competition between exchanges, and as far as the Hong Kong Stock Exchange is concerned, it also hopes that more companies will go public in Hong Kong. Judging from the current policy, hkex has become more proactive and has adjusted relevant policies to attract more companies to list in Hong Kong. Xia Chun, chief economist of Yinke Holdings and president of the Institute of Financial Research, told Caijing, "From a regulatory point of view, the central government also hopes for the integration between the mainland and Hong Kong." Some of the policies introduced by Hong Kong in recent years have played a great role in helping mainland enterprises to raise funds."

After the sharp correction in stock prices, a group of Chinese stock companies began to come up with real money and silver to save themselves. At present, a number of companies, including Alibaba, have issued share repurchase plans.

On March 22, Alibaba announced that it would increase the size of its share repurchases from $15 billion to $25 billion (about 159 billion yuan), up to nearly one-tenth of its market capitalization, and its repurchases would continue until the end of March 2024.

In addition, BOSS Direct Also recently announced that it will repurchase up to $150 million of shares in the next 12 months; Futu Securities said it plans to use its own funds to repurchase no more than $500 million of American depositary shares by December 31, 2023.

On the evening of the 25th, another Internet giant, Tencent, also announced that it would spend HK$300 million to buy back 838,000 shares on the same day.

Alibaba's $25 billion buyback program is the highest in the history of Chinese stocks.

CICC pointed out in the research report that Ali still has many challenges to overcome in the future, but from the perspective of marginal change, it has reached a stage where the probability of marginal improvement is much greater than the probability of continued deterioration. Combining various factors, CICC gave Alibaba a target price of HK$161 for Hong Kong stocks.

Industrial Securities research shows that from the historical data statistics, large-scale corporate buybacks often indicate a phased bottom, and the follow-up is accompanied by a wave of rising market.

The Crisis of Chinese Stocks has not yet been lifted, and Tian Xuan believes that the trend of return of Chinese stocks will intensify in the future, and the Hong Kong stock and A-share markets will increase reform efforts to improve the tolerance of entrepreneurial enterprises.

The author is a reporter for Caijing