China Inc. Is Unloved Abroad, Unwanted at Home

(Bloomberg Opinion) -- Just like the tens of millions of migrant workers stranded by China’s coronavirus lockdowns, hundreds of mainland companies listed in the U.S. are stuck, unable to go home and without a future in their adopted land. They make perfect prey for short sellers.

The climate in the U.S. is getting uncomfortable for China Inc. President Donald Trump has renewed his trade-war rhetoric while pointing fingers at Beijing for the Covid-19 outbreak. On Monday, his administration asked a government pension fund to block investment in Chinese stocks. Meanwhile, the spectacular admission that Luckin Coffee Inc., the upstart rival to Starbucks Corp., faked its sales figures has ripped open age-old doubts about accounting standards.

Unfortunately, even if these businesses wanted to prove they’re fraud-free, Beijing’s new securities law forbids cooperation with U.S. regulators.

Unlike most other nations, China doesn’t allow the Public Company Accounting Oversight Board — an auditor of auditors, set up after the Enron scandal — to inspect the work papers of its U.S.-listed companies. The Securities and Exchange Commission has issued warnings about the quality of these reviews, even when the industry’s biggest names are signing the annual reports (as was the case with Luckin). SEC Chairman Jay Clayton singled China out in a public statement late last month.

The SEC has good reason to be annoyed, as Beijing’s tough stance has only hardened with a new law that took effect in March. Item 177 states that overseas regulators can’t directly inspect or collect evidence on Chinese soil. In addition, domestic companies aren’t allowed to provide any relevant supporting documents without permission. As a result, the cloud of suspicion over these businesses will only grow darker. Even the most well-meaning among them won’t be able to prove otherwise.

Going home was always the grand slogan whenever China Inc. felt mistreated or undervalued abroad. The nation’s stock frenzy in the first half of 2015 saw a wave of take-private deals, to the tune of $24 billion, as companies trading in New York rushed to go public in Shanghai or Shenzhen. The timing seems ripe again, especially now that mainland exchanges and Hong Kong both allow secondary listings.

But there’s a new problem: China doesn’t want these companies back. Its bourses’ secondary listing requirements rule out most small caps. Hong Kong, for instance, demands that companies need to already have a market cap over $5.2 billion, or barring that, $129 million in annual sales and a market cap of at least $1.3 billion.

As for China, secondary listing rules released last month are intriguing. Beijing relented on its obsession with blue chips — the required market cap was lowered to $2.8 billion from $28 billion. There’s a catch, though. Smaller companies must have “independent research,” “world-leading technology” and an “edge” in their field. In other words, don’t bother if you’re sub-scale. The likes of e-commerce retailer Vipshop Holdings Ltd., online dating app Momo Inc. or after-school education provider New Oriental Education & Technology Group Inc. can stay put. What China wants is hard tech that spends millions on research and specializes in semiconductors and artificial intelligence.

Alibaba Group Holding Ltd. has become the face of China for retail investors in New York, while e-commerce operator Pinduoduo Inc. and social video site Bilibili Inc. have become hedge fund playthings. Yet hundreds of more obscure names list in the U.S. Of the 335 stocks, only 27 have a market cap of more than $2.8 billion, data compiled by Bloomberg show, and most would still need to pass Beijing’s “edge” test. As for Hong Kong, less than 40 stocks are eligible for a dual listing.

Will Beijing allow hundreds of its companies stranded overseas to languish? You bet. If you can’t make it in New York, Shanghai isn’t for you either, the thinking goes. As China looks to build its FANG equivalent — the big names that give the U.S. tech supremacy — more obscure mainland rivals will be forgotten. Except, of course, by short sellers.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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