July 7, 2021, | AtoZ Markets- Beijing has been intensifying its supervision of Chinese companies listed in the United States. The majority of these companies are in the technology sector.
The State Council recently said it will update the rules of the “overseas listing system for domestic enterprises,” while also tightening restrictions on cross-border data flows and security.
China’s most powerful companies, including Didi, Alibaba and Tencent, are once again under immense scrutiny as the country’s leaders have promised to crack down harder on domestic companies listed on U.S. exchanges.
In the meantime, these measures could change a $2 trillion market, and regulatory pressure may threaten IPOs currently in the pipeline, and may also change the popular Chinese ADR market.
What Are ADRs and Why Are They Important to the Market?
ADRs (American Depositary Receipts) are certificates issued by American depositary banks (such as J.P. Morgan or Citibank) that represent a specific amount of shares of a foreign company and are backed by local shares, called ADSs (American Depositary Shares).
In simple terms, the american banks issues certificates (ADRs) to the market and supports them through the purchase of local shares (ADS).
The ratio between the ADR and the ADS is not always 1, and is determined at the time of issuance, and is called the “Depositary Receipt Ratio”. For example, a 2:1 ratio indicates that every two local shares, ADSs, are equivalent to one ADR.
The ratio between the ADR and the ADS is not always 1, and is determined at the time of issuance, and is called the “Depositary Receipt Ratio”. For example, a 2:1 ratio indicates that for two local shares, ADSs are equivalent to one ADR.
Currently, there are at least 248 Chinese companies listed on the three major U.S. stock exchanges, with a total market capitalization of $2.1 trillion. Likewise, there are also eight national Chinese state-owned companies that are listed in the United States.
NASDAQ Golden Dragon China Index
The NASDAQ Golden Dragon China Index is a modified market capitalization weighted index comprised of companies whose common stock is publicly traded in the United States and the majority of whose business is conducted within the People’s Republic of China.
The Index is designed to provide insight and access to the unique economic opportunities taking place in China while still providing the transparency offered with U.S. listed securities.
The Index divisor was initially determined to yield a benchmark value of 2,500.00 at the close of trading on September 30, 2003. The NASDAQ Golden Dragon China Index was created by, and is a trademark of, Halter Financial Group.
The Index is composed of US exchange-listed companies that are headquartered or incorporated in the People’s Republic of China. The Index are rebalanced and reconstituted quarterly.
Some of these major Chinese companies are darlings on Wall Street. For years, Alibaba has been among the five-most owned stocks by hedge funds, along with Facebook, Microsoft, Amazon, Alphabet, according to Goldman Sachs.
In 2020, 30 China-based IPOs in the U.S. raised the most capital since 2014, according to data from Renaissance Capital.
As we can see, this new move by the Chinese government could be a big trouble to companies that have been waiting to list in New York in recent years. There could be fewer and slower new listings in U.S. due to the government crackdown.
These New Decisions Are a Risk for Investors
These new decisions from China, it would also threaten a lucrative line of business for Wall Street banks and add to concerns of a decoupling between China and the U.S. in sensitive areas like technology.
Chinese firms have raised about $ 76 billion through first-time share sales in the U.S. over the past decade.
Meanwhile, the China Securities Regulatory Commission is leading efforts to revise rules on overseas listings that have been in effect since 1994 and make no reference to companies registered in places like the Cayman Islands.
So far this year, 37 Chinese companies have listed in the U.S., surpassing last year’s count, and raised a combined $12.9 billion, according to data compiled by Bloomberg. One-third of these firms were trading lower on Tuesday.