Not long ago, investors were afraid US regulators would delist the army of Chinese companies quoted in New York over prosaic audit standards. The bigger concern right now is that Beijing will pull the rug from under businesses such as Alibaba by curbing or closing an offshore ownership loophole.
The status of the financial tourists has always been ambiguous. Most depended on a 27-year-old rule permitting subsidiaries incorporated outside China to list overseas without official approval. The ecommerce giant set up by Jack Ma boasts a US listing via an entity incorporated in the Cayman Islands, for example.
The legal title of US shareholders to the underlying Chinese assets is tenuous. Rumours are now flying that Chinese regulators are pondering “variable interest entities”. If these are made harder to set up or prohibited it could cause significant disruption and cost to investors.
The speculation follows a painful slapdown for Didi Chuxing, which floated in the US last week. China has banned the ride-hailing app from online stores and hit the company — and a string of other tech businesses — with antimonopoly fines.
Would-be debutantes are already calling it quits. LinkDoc, a medical data company backed by Alibaba, cancelled its New York listing just after closing its order book on Wednesday.
Beijing has signalled it would prefer companies to list on mainland venues such as Shanghai’s Star Market. Incentives there include looser valuation and trading price limits.
Chinese companies have preferred New York for the unrivalled depth of its equity market, supported by a large cohort of expert tech investors. The bumpy performance of mainland-listed Chinese stocks has been another deterrent.
Local markets have recovered, with their total worth exceeding $10tn last year. Liquidity has improved as 178m new stock investors signed up on the mainland in 2020 alone, according to local exchange data. There are more new joiners too. Shanghai Stock Exchange, which includes its main board and Star market, topped the list globally with 233 IPOs.
China would love to claw back some of the liquidity lost to New York. In time, this could help reduce the discount separating mainland listed stocks from US-listed peers.
But restricting or banning VIEs would be a huge gamble. It would send a terrible message to foreign investors about the openness and predictability of the Chinese economy. Officials must realise that lower-scale hostilities of the kind epitomised by the attack on Didi would nudge business into line with far less dislocation.
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