What’s more shocking? Kicking out Chinese companies listed in the U.S., or a sudden U-turn from one of America’s biggest stock exchanges on its plan to do so? The final days of the Trump administration won’t be boring.
The New York Stock Exchange said late Monday that it no longer intends to move forward with the delisting of China’s three state-owned telecom operators. The terse statement came just days after the bourse announced it would start the procedure, citing an executive order issued in November preventing Americans from investing in companies with Chinese military ties.
This sudden change of heart caught traders off-guard. The universal first read at various equity-trading and sales desks in Hong Kong was shock and befuddlement. Investors nonetheless saw this as a bullish signal. Shares of the three companies — China Mobile Ltd., China Telecom Corp. and China Unicom Hong Kong Ltd. — surged, while the offshore yuan, sensitive to ties between Washington and Beijing, pushed even higher.
Kicking out mainland companies from American exchanges has been a long endeavor of a White House seeking to limit Chinese access to U.S. investment dollars. The president and allies such as Republican Senator Marco Rubio have harped on China Inc.’s shady accounting practices and Beijing’s unwillingness to allow U.S. audits.
But any focus on fraying investment ties misses the point: Direct listings in New York aren’t a good idea, whether or not the Public Company Accounting Oversight Board is allowed to do its job. The key reason is that China is a nation with fast and furious credit cycles, and an ever-changing regulatory environment. Investing there shouldn’t be this easy for someone sitting on Park Avenue who has never bothered to walk the crowded streets of Beijing or Shanghai. Just consider the accounting scandals that unfolded at Luckin Coffee Inc., once an investor darling in New York that was shunned back home.
Now the NYSE fiasco gives even more reason for Chinese companies to return home, as liquidity and listing conditions improve. Just as their New York counterparts are groping in the dark on Beijing’s policies, Asian traders have no clue how U.S. politics work, either. But an ability to read the tea leaves is critical, even at this late juncture in President Donald Trump’s term. All NYSE said was that its reversal was “in light of further consultation with relevant regulatory authorities,” without elaborating further, and markets went wild.
A rational trader would ask why these telecom stocks are moving at all. If Beijing suddenly puts out signals that it intends to make national champions out of dumb pipes, I’d get it. That could affect company financials and cash flows. But why should the NYSE influence sentiments in Hong Kong?
Just like the offshore yuan, stocks with U.S. listings have become market playthings on U.S.-China relations. While it’s reasonable to expect that foreign exchange is loaded with bets on geopolitics, telecom stocks traditionally are valued using concrete cash-flow analysis and mundane metrics, such as enterprise value to Ebitda, or earnings before interest, taxes, depreciation and amortization. They shouldn’t be driven by blind speculation.
After all, NYSE could just have taken a precautionary stance since the executive order prohibited “transaction in publicly traded securities” of “any Communist Chinese military company.” How do you prevent transactions unless you delist, NYSE may have reasoned. But the order itself didn’t require it. This document only sowed confusion among exchanges and index providers. In the end, NYSE’s reversal may not signal a subtle change in geopolitics at all.
Granted, I might be biased. Just like tens of thousands of financial worker bees in Hong Kong, I don’t feel like toiling away well into the night just because hot Chinese tech stocks are trading in New York. But we’ve got many reasons to ask domestic companies to come home. Neither side of the Pacific should be flying blind. If you want to invest in China, come here and work Asia hours.
© 2021 Bloomberg L.P.