Yahoo Finance Why China is cracking down on certain publicly-traded companies, according to Carson Block
Short seller Carson Block gained notoriety for exposing the fraudulent accounting practices of U.S.-listed Chinese companies. But the founder of Muddy Waters Capital now believes the days of Chinese companies tapping American capital markets are over.
In an interview with Yahoo Finance Live, Block attributed the recent regulatory crackdown on China’s largest firms to an acceptance by Beijing’s leadership that the delisting of its U.S.-listed firms is "inevitable."
“I think Xi Jinping is saying look, U.S.-listed companies need to understand that they have to find an alternate way of accessing capital markets. Come back to the mainland, come to Hong Kong, but their days in the U.S. are numbered,” Block said. “If Chinese companies largely get out of the U.S. before the mandate to delist kicks in, then it kind of looks to Xi's domestic audience, like Chinese companies left the U.S. out of strength, as opposed to being thrown out.”
Congress passed a law last year, banning foreign companies from listing their securities on U.S. exchanges for failing to comply with American rules for three consecutive years. The Holding Foreign Companies Accountable Act was signed into law in response to concerns that Chinese firms were skirting financial auditing by the Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation Congress created in 2002, because of Chinese resistance to overseas inspections of its companies’ audits.
The law’s three-year grace period has forced Chinese firms to reconsider their options: comply with disclosure requirements that could put them at odds with regulators back home, or move their securities outside of U.S. exchanges.
“I always thought China would give in at the 11th hour on auditor inspections. And the reason I thought that was because so many [Chinese Communist Party] officials have undisclosed stakes in these U.S.-listed China companies,” Block said. “But I think Xi Jinping has decided not to give on auditor inspections. And I think that's because, right now, he has to play to this domestic audience of not being bullied around by the U.S.”
Block said recent crackdowns on some of the biggest Chinese firms are proof of that.
Following ride-hailing giant Didi Chuxing’s (DIDI) $4.4 billion IPO in June, China’s Cybersecurity regulators opened an investigation into the firm and banned the app from accepting new users, causing its U.S.-listed shares to plummet. The Wall Street Journal reported Beijing officials urged Didi to delay its listing over concerns IPO documents required by the U.S. Securities and Exchange Commission (SEC) could contain sensitive information and data.
Last month, China-based tutoring firms New Oriental Education & Technology Group (EDU), TAL Education Group (TAL), and Gaotu Techedu Inc. (GOTU). saw their shares fall more than 40% as regulators attempted to exert control over the industry, by calling on the firms to go nonprofit.
Earlier this week, Tencent (TCEHY) was briefly toppled as Asia’s most valuable company, after state-run media ran an article, calling online gaming "a spiritual opium.”
Combined, the regulatory shake-ups have erased more than $1 trillion from the market value of U.S.-listed Chinese stocks.
Regulatory squeeze
“I think that from the Wall Street perspective, the perspective of the banks and asset managers, they're not liking this because they want to continue to sell the dream to U.S. investors and make the fees associated with that,” Block said. “I do personally think it's healthy if less U.S. retail money and pension money gets put into these things.”
The scrutiny in China has come, as the SEC looks to tighten the screws to protect American investors. Last week, SEC Commissioner Gary Gensler halted all IPOs of Chinese firms, pending further risk disclosures.
Block said the regulatory squeeze is likely to push more Chinese firms to seek listings in Hong Kong and the mainland markets, over the next three years. Many firms, including Alibaba (BABA), JD.com (JD), and NetEase (NTES) have already sought secondary listings on the Hong Kong Exchange.
But Block said he doesn’t believe the Hong Kong market has the liquidity to support a wholesale relisting of Chinese securities in the U.S., leading to consolidation.
“I think your tier one U.S.-listed China companies will be able to find reasonable markets over in Hong Kong, meaning some liquidity, etc. It won't be anything like the liquidity in the U.S. But your tier two and tier three companies are going to have problems,” he said. "I think that maybe you can start to see some acquisitions over time of these tier two companies by the tier ones because they just — there's not enough liquidity in HK."
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita
