Lame Duck Delisting

Sneaking in big announcements on the eve of major holidays seems to be en vogue with regulators these days.

China’s State Administration for Market Regulations announced its antitrust investigation into Alibaba on Christmas Eve, so I spent Christmas Day writing “Alibaba and Antitrust with Chinese Characteristics.” Not to be outdone, the New York Stock Exchange announced its intention to delist three state-owned telecom companies -- China Telecom, China Mobile, and China Unicom Hong Kong Limited -- on New Year’s Eve to comply with a Trump executive order (EO).

As if the announcement itself wasn’t headline-grabbing enough, the NYSE canceled the delisting plan (apparently because it wasn’t sure if the three telcos fall into the EO’s scope) only to reverse the cancellation and put delisting back on track, after receiving “new specific guidance” from the Treasury Department that these telcos are indeed covered by the EO.

Assuming nothing else happens, trading of these three companies will be suspended by 4 a.m. ET on Monday, January 11, 2021. Let’s dive into what this delisting means to the companies themselves and broadly to American’s future China policy.

Minimal Damage

In terms of business operations and financial impact, the real damage will be minimal. As the China Securities Regulatory Commission pointed out emphatically via the Global Times, the combined value of these three telcos’ American Depositary Receipts (ADRs) listed on the NYSE is worth about $3 billion. Their combined market cap, on the other hand, is about $145 billion, so exposure to the US capital market is only about 2%.

Furthermore, these three telcos are the only US-listed companies on the US Defense Department’s so-called “Communist Chinese military companies” list. So as far as using delisting as a tool to implement Trump’s EO, this is a one-time action.

Given such a tiny exposure, why were these three companies listed on the NYSE in the first place? As it turns out, they’ve been on the exchange for a long time, back when China’s own capital market was a fledgling version of its current self. Thus, there was a time when Chinese telcos, plus other state-owned enterprises, did need access to American capital to grow as companies. China Mobile, the largest of three, began trading on the NYSE in November 1997. China Unicom and China Telecom started trading in July 2000 and November 2002, respectively. To put those dates in context, the Shenzhen Stock Exchange and the current iteration of the Shanghai Stock Exchange weren’t founded until 1990, and Hong Kong only became a special administrative region in July 1997. Somewhat recent events that can feel like ancient history.

Of course, the stock exchanges in Hong Kong, Shanghai, and Shenzhen have all grown by leaps and bounds since then. Based on this report by KPMG on IPOs and capital markets, the Hong Kong and Shanghai stock exchanges have been ranked top 5 in the world by amount of money raised from IPOs in the last two years. Shenzhen was top five in 2020. The Saudi stock exchange only made the cut in 2019 because of that one-time, massive IPO by Aramco.

Given the increasing fluidity of different capital markets, American funds that want to continue owning shares of Chinese companies can simply dump the ADRs listed on Wall Street and buy shares of the same companies being traded in Hong Kong or Shanghai -- inconvenient but not difficult. Last year, some funds that wanted to continue owning shares of companies like Alibaba have swapped New York-listed shares for Hong Kong-listed ones, to hedge against future delisting.

The degree to which this delisting will reduce American money from investing in Chinese companies that may be bad actors -- the stated goal of the EO -- will be minimal. So will the damage being done to these companies’ balance sheets and business operations, almost all of which happen inside China.

Nevertheless, we shouldn’t take this delisting lightly; it’s still an important action because of its symbolism and timing.

Lame Duck Trapdoor

No Chinese company has ever been forced by policy to delist from an American stock exchange, though companies, like SMIC and 58.com, have delisted voluntarily to either avoid tougher regulations or just to boost its valuation in a more friendly market. Thus, this mandatory delisting by the NYSE symbolizes yet another new level of hostility between the US and China. It’s also an action that’s difficult for the Chinese government to respond (or retaliate) proportionally. While the Ministry of Commerce has vowed “to take necessary measures to protect Chinese enterprises' legitimate rights and interests”, what can actually be done is unclear. Few American companies are listed on any Chinese or Hong Kong stock exchanges, so a similar delisting action would not work. It’s possible that the “Unreliable Entity List” (UEL), a new policy tool introduced by the Ministry last year, will be used in some way to facilitate these “necessary measures.” Which American company gets “listed” so there’s some level of response, but not too much, similar to the minimal damage done to the three Chinese telcos, will be a tricky dance move to finesse. (If the UEL is used, my current prediction is Cisco, whose revenue is already falling sharply in China, while its products and services can be sufficiently replaced by Huawei’s.)

Beyond the symbolic tit-for-tat, the timing of this delisting, which occurred during Trump’s “lame duck” period, further corners the options available to the incoming Biden administration. When the Holding Foreign Companies Accountable Act (HFCAA) was poised to pass Congress back in November and December, Trump’s EO, signed during the week after Election Day when it was clear that he would not be re-elected, is somewhat redundant.

The HFCAA mandates that all foreign companies traded on an American stock exchange abide by the accounting standards set forth by the SEC’s Public Company Accounting Oversight Board -- the auditor of the auditors. As the HFCAA gets implemented, chances are the three Chinese telcos (and likely a handful of other companies) will have to delist anyway. And to be clear, I support the spirit of the HFCAA and believe the same accounting standard should be applied equally across the board, so much so that I’ve advocated for Huawei to go public in the US, if it is indeed a good actor with nothing to hide.

So why did Trump sign his executive order to accelerate the pace of delisting in his waning days as president?

It’s another way to rack up more “Fuck China” accomplishments. Just signing the HFCAA into law wouldn’t score as many points. The law passed by unanimous consent in both the House and the Senate, meaning every member wanted to vote “yes” so there was no point in even calling for a formal vote procedure. Such level of agreement only happens when Congress names a post office. If everyone agrees, Trump’s own agreement does not stand out. By doing more, however unnecessary, and being the undisputedly toughest American politician on China, Trump can either empower his own position if a 2024 presidential run is in sight, or strengthen his new role as the “kingmaker” to the Republican Party’s new generation of ambitious, opportunistic China hawks, like Senators Hawley, Rubio, Cruz, and Cotton.

Unlike congressional legislations, EOs can be easily revoked by a new president, but seems unlikely to happen. New lame duck EOs on China, like delisting and the recent Chinese apps transaction ban (another action with minimal damage but maximal symbolism), narrow the Biden administration’s policy options further. Any semblance of reasonable dealing or engagement with China will be attacked, and there’s no congressional gridlock to point to, because everyone in Congress already despises China. There’s no other direction to go but tougher, even though the number of policy actions is dwindling, so the “surface area” of toughness must expand.

We may be seeing this “expansion” already, with the incoming National Security Advisor, Jake Sullivan, tweeting to raise concerns about the China-EU investment agreement signed just before 2020 expired.

At least two of the companies currently on the “Communist Chinese military companies” list -- China State Construction and Panda Electronics -- are listed on the Frankfurt stock exchange. Will we see the Biden administration pressure European allies to delist Chinese companies on their own exchanges as well?

To be clear, I fully expect the Biden administration to be more competent policymakers and promulgators in all areas compared to the Trump administration. For one, they would not make the amateur mistake of issuing unclear guidance around what is and isn’t covered in an executive order.

But for anyone hoping for a more cooperative and more nuanced set of China policies in the next four years, the probability of that happening has always been low. And this lame duck delisting just lower it further.

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