Alibaba Group Holding (BABA) and HK:9988 says it will "strive" to maintain its U.S. listing, after the e-commerce provider was added to a U.S. watchlist that could result in it being booted off the New York Stock Exchange.
The U.S. Securities and Exchange Commission has newly added Alibaba to its list of companies that fall afoul of the Holding Foreign Companies Accountable Act. Such companies, which file accounts that the SEC's accounting arm is unable to inspect, face delisting if they fail to file compliant accounts for three straight years.
As a result, BABA shares could be stripped from the NYSE in 2024. Alibaba currently already has a secondary listing in Hong Kong, as of 2019. Last week, it said it would apply to have a primary listing on the Hong Kong Stock Exchange, a move likely to happen before year-end, giving it equal-status listings in both New York and Hong Kong.
Alibaba hopes a primary listing in Hong Kong would result in an increase in trading volume. In the first half of 2022, the vast majority of its trading came on Wall Street, with trading volume for BABA averaging US$3.2 billion per day, compared with only US$0.7 billion for HK:9988 in Hong Kong.
Mainland investors would gain new access to Alibaba shares if the joint-primary plan goes ahead. A primary listing would be eligible for the Hong Kong Stock Connect program that allows mainland Chinese investors to invest into Hong Kong-listed companies. Secondary listings do not qualify for the Stock Connect plan.
After the SEC's action, Alibaba shares ended the day down 3.8% in Hong Kong trade on Monday, having fallen 11.1% on Friday in New York. It has been a generally positive day's trade in Asia on Monday, with the Topix up 1.0% in Tokyo and the CSI 300 index of mainland Chinese companies up 0.5%, even if Hong Kong's benchmark Hang Seng index only inched ahead 0.1%.
Alibaba was added to the list of non-compliant companies by the SEC on Friday, alongside the fashion social-media site Mogu (MOGU) , the Artificial Intelligence-charged robot maker Cheetah Mobile (CMCM) and the online pet store Boqi Holding (BQ) .
In response, Alibaba says it will "continue to monitor market developments, comply with applicable laws and regulations and strive to maintain its listing status on both the NYSE and the Hong Kong Stock Exchange."
There are now 161 Chinese companies on the SEC's list. The U.S. stock watchdog is essentially adding companies to the roster of non-compliant companies when they file their annual reports. Alibaba posted its annual report last Tuesday, and is due to hold an analyst call to discuss the results this Thursday.
Boqi shares fell 9.3% in New York on Friday, while the penny shares of Cheetah Mobile corrected a slide to inch ahead 1.4% and Mogu climbed 3.5% to halve its decline over the last five days. All were looking at losses over the course of last week, however.
Essentially, all the Chinese companies listed in the United States will eventually be added to the SEC's list. The authorities in China have barred its accounting firms from sharing audit data outside China's borders for fear they might inadvertently spill "state secrets." The Chinese Communist Party keeps a very tight lid on information, with even electricity usage classified as privileged in the past because it could indicate the strength of the economy. Since many listed Chinese companies are at least partially state-owned, sharing the details of how they operate makes the skin itch for a "control-freak" party intent on censoring daily life.
As of the last count in March, there are 261 Chinese companies listed in the United States, worth a combined US$1.3 trillion in market value.
But the Chinese authorities know that the well of the capital markets in the United States is far deeper than that in China, with trading more consistent and less-driven by the whims of momentum-chasing retail investors. It is very difficult for international investors to buy shares on the stock exchanges in Shanghai, Shenzhen and Beijing, where there are strict quotas on the participation of foreign banks, the currency is carefully controlled, and the repatriation of profits is difficult.
As I explained last week, Chinese regulators are thought to be working on a three-tier categorization of companies to enable compliance with the SEC rules: companies with non-sensitive data; companies with sensitive data; and companies with secretive data.
Holders of non-sensitive data should have no trouble retaining a U.S. listing. Those with secretive data would certainly be forced to delist. The troublesome middle ground of companies with semi-sensitive data could, however, cover the vast majority of Chinese tech companies, which generally appeal the most to U.S. investors. The SEC says its accounting arm must have complete access to audits, with "no loopholes or exceptions."
The lineup on the SEC's list of noncompliance already includes a score of leading Chinese enterprises, including browser operator Baidu (BIDU) and HK:9888, video-sharing site Bilibili (BILI) and HK:9626, Macau casino operator Melco Resorts & Entertainment (MLCO) , group-buying site Pinduoduo (PDD) , music-streaming site Tencent Music Entertainment Group (TME) , and the Twitter-like platform Weibo (WB) and HK:9898. All three Chinese electric-car makers listed on Wall Street - Li Auto (LI) and HK:2015, Nio (NIO) and Xpeng (XPEV) and HK:9868 - are also targeted.
Ironically, none of those companies has prominent levels of state ownership. But the harsh treatment of the ride-hailing site DiDi Global (DIDIY) by Chinese cyberspace authorities indicates their mounting concern over Big Tech's Big Data. DiDi chose to delist in the United States after being barred from signing new customers and having its apps stripped from app stores in China.
DiDi was punished with a US$1.2 billion fine last month, a move that I indicated should mean its travails are nearing an end. It intends to relist in Hong Kong, though it has been waiting for its penalties to be announced and for a resumption of its ability to sign new business. Its shares fell 82.4% in their time as DIDIY on the NYSE.
The Holding Foreign Companies Accountable Act went into effect in December 2020. It applies to all U.S.-listed companies based outside the United States, and in terms of accounting data only requires them to adhere to the same level of data disclosure that U.S. companies must already meet. Besides filing compliant financial data, they must also indicate if they are owned or controlled by a foreign government.
There are some stipulations specifically aimed at Chinese companies. Those companies would have to indicate which of their board members are members of the Chinese Communist Party. They must also reveal the content of any information in their charters that refers to the CCP.
The CCP has increasingly taken to adding language into a company's charter indicating that the Communist Party is the ultimate authority over the company, able to override decisions made by the shareholders or the board. Many companies have a cell of the Chinese Communist Party operating inside the company, an office that previously served little purpose but has taken on greater importance under the more-muscular form of Maoist Communism pushed by Chinese President Xi Jinping.
Alibaba's initial public offering in New York in September 2014 was the largest in history at the time, worth US$25 billion. The company last April received a record US$2.8 billion fine in China, the largest corporate penalty ever introduced by Beijing, for engaging in monopolistic behavior. But the shares bounced on announcement of the fine, with investors betting the crackdown on the company, which also saw its October 2020 plans scuppered to float shares in fintech spinoff Ant Group, is at an end.