Analysis-Chinese investors hedge US delisting risk by playing Hong Kong

The pace of migration is likely to pick up as more New York-listed Chinese companies are expected to follow tech giant Alibaba’s plans to launch so-called Hong Kong primary listings, which could boost liquidity. in this city to facilitate the transition.

KraneShares CSI China Internet ETF (KWEB), a New York-listed fund focused on Chinese technology stocks, began swapping American Deposit Receipts (ADRs) for Hong Kong stocks in December, when US securities regulators issued a finalized rules to prohibit trade from Chinese companies that fail to comply with US auditing rules.

Under US rules, Chinese ADRs will be thrown off exchanges in early 2024 if US regulators cannot gain full and timely access to DeepL’s audit working papers from Chinese companies – a request denied until ‘ introduced by Beijing for national security reasons.

Hong Kong-traded equities make up more than 70% of KWEB’s portfolio, according to the latest data, up from just 25% in March 2021. By the end of the year, the fund aims to be fully invested in Hong Kong equities .

“It is up to both parties to resolve this issue because there is no winner in a delisting scenario,” said Brendan Ahern, CIO of Krane Funds Advisors, which manages the fund.

But under the fiduciary duty to protect investors’ money, “you’re going to take the more conservative route.”

Mr. Ahern hailed Alibaba’s plan to upgrade its Hong Kong secondary listing to a primary listing, saying such a move “allows companies to have butter and butter money.”


Nevertheless, Hong Kong is a relatively small and retail-oriented market compared to the United States, and it could face pressure to offer liquidity support if the delisting takes place, Jon said. Withaar, head of special situations equities in Asia at Pictet Asset Management.

“You have so many companies that are Chinese ADRs that will have to go home. It’s almost a trillion dollars, plus a lot of companies in the private space that are looking to go public,” he said. he said.

A primary listing would allow the stock to be included in the China-Hong Kong Stock Connect, making the stock eligible for Mainland investment and potentially increasing trading volumes, but nothing like the depth of US markets.

According to the World Federation of Exchanges, stock trading volume on the New York Stock Exchange and Nasdaq was each around seven times that of the Hong Kong stock exchange in 2021.

Jon said he has both Chinese ADRs and Hong Kong stocks in his portfolio due to the uncertainty of the delisting.

The US market offers better liquidity but Hong Kong trading hours are easier to manage, the Singapore-based manager said.

Alibaba will likely trigger “a wave” of primary listings over the next 12 months, which could increase the average daily turnover of these stocks by 50% once they are included in the Stock Connect, estimates Citic Securities .


Thomas Masi, co-portfolio manager of the GW&K Emerging Wealth strategy, which has heavy exposure to China, has already transferred stakes in companies such as Alibaba from New York to Hong Kong, but has not yet abandoned ADRs from and Yum China Holdings.

“We only have three Chinese holdings where we hold ADR…because liquidity is overwhelmingly concentrated in the ADR form,” said Nuno Fernandes, partner and portfolio manager at GW&K, adding that a change will take place when there is sufficient liquidity in Hong Kong.

But he remains convinced that the vast majority of Chinese ADRS will be maintained: “It must not be a zero-sum game, Hong Kong or New York.”

In late May, Beijing said both sides were determined to find a solution, but Washington was more cautious about the outlook.

“Our baseline scenario is that the authorities reach a resolution on US listings and the status quo of more than two decades remains,” said Thomas Hayes, chairman and managing member of Great Hill Capital, a New York-based hedge fund. However, he also moved his holdings to Hong Kong when possible.

Some fund managers say they will stick to ADRs.

“We still own ADRs from Alibaba and Tencent,” said Adam Coons, portfolio manager at Winthrop Capital Management.

“We still think it’s highly unlikely that China and the United States will fail to find a solution and that Alibaba will not be delisted. Either way, it’s become a topic which pulls the stock down,” Coons said.

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