Chinese IPO pipeline in U.S. 'is going to dry up,' analyst says

Macrolens Managing Principal Brian McCarthy anticipates market shifts for Chinese companies that may shy away from foreign markets following DiDi Global's example after its delisting from the NYSE.

Video Transcript

AKIKO FUJITA: We are seeing some of those big Chinese tech shares seeing a bounceback today after the sell off we saw on Friday on news that ride hailing company Didi is delisting from the New York Stock Exchange, just six months after listing in the US after increased pressure from Beijing. So the big question here is, will this prompt other Chinese companies to follow?

Let's bring in Brian McCarthy. He's Macrolens managing principal. And Brian, you know, it seemed like almost immediately after Didi listed, the hits started to come, especially from Beijing. Regulatory authorities there have said they're really concerned about the data security, specifically as it relates to Didi. But how much of this you think is a sign of things to come?

BRIAN MCCARTHY: Well, there are a lot of crosscurrents here. For one, Didi ran a regulatory flashing yellow light when they were preparing for their IPO. So they were in line to get, you know, rectified by the Chinese government. So that's not really much of a surprise. The broader issue here is that over a number of years, the US and China have been unable to come to agreement on Chinese companies meeting US accounting standards.

And in 2020, the US passed the Holding Foreign Companies Accountable Act, which said we need we need resolution here. We need Chinese companies to be audited by auditors that get the stamp of approval from the US regulators, namely the PCAOB, the Public Company Accounting Oversight Board-- a bit of a mouthful.

But this has been unable to be resolved. And now the SEC has said we're starting the clock. Within three years, any Chinese company that doesn't adhere to these standards is out. China is not going to adhere to these standards. And there are bigger issues on the other side as well. The Chinese do not want tech companies in particular to have to acquiesce to some kind of accounting oversight that they claim might reveal data that they want to keep secure. So we are decoupling in terms of, I think, Chinese companies listing on US exchanges.

AKIKO FUJITA: Brian, it feels like we've been talking about that decoupling for some time. And when that Holding Foreign Companies Accountable Act was first passed, we had that conversation to say, well, are Chinese companies going to still seek listings in the US? And yet, here we are, talking about Didi, which, at the time this year, was one of the biggest listings. So do you think what happens with Didi here completely shuts the door for Chinese companies in their risk calculation to say maybe it's just not worth going to the US anymore?

BRIAN MCCARTHY: Yeah, I think that pipeline of Chinese companies IPO-ing in the US is going to completely dry up. So, you know, the US investment banks will regret that because they've made some money bringing those companies to market. But I think that's over. And so these companies will gradually delist. I don't see that as in and of itself as being that big a deal. Many institutional investors are already moving from ADRs of Chinese listed companies, if they're dual listed, into the Hong Kong-listed shares.

And you can see another objective of the Chinese, which is to turn Hong Kong into a rival global financial market to New York and London. So this-- you know, moving these listings to Hong Kong, which is now under greater control of the Chinese government than it's been in many decades, suits-- you know, checks another box for the Chinese government. So I think the stars are all aligned for this process to continue until all of the major Chinese companies that are listed here are in Hong Kong.

AKIKO FUJITA: Yeah, even with that said, foreign investors can still invest in stocks in the Hong Kong market. I mean, if you're talking to investors out there who are saying, look, I still think the growth story outweighs the risks that come with that, what do you say? What is the case for holding or investing in some of these Chinese growth names in the face of this uncertainty that's happening domestically?

BRIAN MCCARTHY: Yeah, I think it's a very difficult question to answer without some insight as to what Xi Jinping's ultimate objective for this sector is. I think last time I spoke with you, we talked about data nationalization so Chinese tech companies are not going to be able to amass and utilize data to create market power the way an Amazon or a Google or an Uber, companies like that in the US, might.

So the Chinese companies-- Chinese counterparts of the big US tech firms are simply not going to be able to be allowed to operate like that. And I think if you think a step further, if the tech infrastructure really only needs one Google and one Amazon and one or two Uber's, why not have those be state owned? So I think this is the big question that I grapple with when struggling to try to value, like, when do you want to try to [INAUDIBLE] and Alibaba or something, it could end up part of the state. That's a completely viable scenario, given the path they're on. So it's problematic for the stocks.

AKIKO FUJITA: It is fascinating to see all the moving pieces right now, Brian. And it's always good to have you on. Brian McCarthy, Macrolens managing principal, good to talk to you today.