Growing number of Chinese companies are exiting the US market
Douglas Freeman and Victor Chen say the growing number of Chinese companies doing the Wall Street walk-out face hurdles as they seek to relist at home
Attracted by the high valuations in the A-share market earlier in the year, a record number of Chinese companies have announced plans to delist from the US and are setting their sights back home. Known as "going private" transactions, close to two dozen companies - mostly in telecoms, media and technology - recently announced they would delist from the US stock market, with most seeking to relist in China.
The value of such deals by Chinese companies from the US this year is US$30 billion, according to Dealogic - almost double the amount from the previous six years combined. The sheer number of deals would put a strain on China's financial system even in good times. Given the recent turmoil in the A-share market and devaluation of the yuan, it is questionable whether all these deals will be completed in the manner originally planned and whether these companies will relist in China, Hong Kong or another viable platform.
The lack of liquidity and failure by investors to adequately value Chinese companies in the US are key drivers for such companies to delist. Many also believe they would currently receive a higher valuation listing in China.
Some companies have had bad experiences with the US regulatory system. The costs of being a listed US company - including initial and ongoing compliance costs and fees, and the potential risks from lawsuits and regulators - are all quite high. This means that although New York has long been the preferred destination for Chinese technology companies to list, they are now seeing the China market as an attractive alternative.
It will not all be plain sailing. Many of the deals have yet to line up financing and could face scrutiny from independent special committees formed to evaluate the fairness of management buyouts to minority investors.
In light of regulatory restrictions on foreign investment in China's domestic market, much of the potential financing is being sought from domestic sources. Chinese banks have been flooded with requests. However, in light of the recent market turmoil, securing funding may be difficult.
For those that do get funded and want to relist in China, a large challenge still awaits, given the volatility in the equity market. Early last month, regulators announced a suspension in new listings until the market stabilises, which could leave many firms in limbo. Then, last week, China devalued the yuan, which is having a huge impact globally.
Even so, the trend is set to continue for small and medium-sized companies to "go private" because of the relative differences in the US and China markets. The question is whether this will lead to a large-scale shift.
Douglas Freeman and Victor Chen are both partners at international law firm Paul Hastings