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Bring it on

20 August 2020 By Pete Sweeney

American investors don’t appear to give a hoot about their politicians’ posturing at Beijing. Shares of Chinese companies in New York have rallied even as legislators try to delist them, and initial public offerings are popping. That may be partly investment banker greed, and perhaps traders’ short attention spans. But it’s also an implicit bet that President Donald Trump, and his crew of China hawks, are bluffing.

Firms from the People’s Republic raised $5.6 billion in the United States so far this year, more than double the figure they had raised by this time in 2019. That includes chandelier-smashing pops like KE Holdings, which opened 75% above its IPO price last week, and there are more in the queue. Secondary market performance has been decent too; companies from the People’s Republic logged an average increase of 7% in the Big Apple last quarter, or 15% when weighted by market capitalisation, according to a Breakingviews analysis.

That’s been a bonanza for investment banks. And with traders flush with liquidity from pandemic bailouts, they have plunged into all sorts of quick China trades, which benefits trading desks.

There’s a problem, however: mainland China companies’ auditors can reject review by U.S. accounting regulators. Because their assets and executives are outside U.S. jurisdiction, American investors have little legal recourse against fraud, or governance abuse which occurs with depressing regularity given U.S. tolerance for weighted voting rights. Nasdaq-listed Luckin Coffee, for example, once worth $12 billion, admitted to fraud in April and was delisted.

Long-term share performance isn’t impressive either. Of the 180 or so Chinese companies trading on main exchanges in New York, two-thirds are below their initial public offering prices, Refinitiv data show. From this comes the push by Republican Senator Marco Rubio and his allies in the White House, to force them to comply to U.S. regulations, or leave the market.

If policy becomes law, some $2 trillion of market capitalisation could evaporate from the boards. But Wall Street is not sweating Pennsylvania Avenue, perhaps because it’s betting against President Donald Trump too. Data from the Center for Responsive Politics suggest the securities and investment industries are giving far more money to Joe Biden than the current president. What looks like bullishness on China might also be bearishness on Trump.

(This article has been corrected to change year from 2020 to 2019 in the second paragraph.)

 

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