As trade war escalates, Chinese tech start-ups are suffering on Wall Street – despite spectacular bull market
Innovative tech companies’ investors are backing off as Washington increases the pressure on Beijing
As the longest bull run in US stock market history charges on, investors continue to look out for ripe new prospects. For years, innovative tech companies out of China had become a promising way to catch the wave.
Tech has been the fastest-growing sector in the Chinese economy, and the country’s start-ups quickly became the darlings of the US market as the domestic roster of public companies shrank. US investors and Chinese tech companies knew they had something to offer each other.
Through initial public offerings on US exchanges, Chinese tech start-ups gained access to the deepest pool of capital in the world. For investors, there was an opportunity to tap into the upside of the sector’s growth – and China’s rise – along with the assurance that the companies had been vetted by the US regulators.
“The beauty to list here is that companies can tap into both markets in Hong Kong and here in the US,” said Alex Ibrahim, head of international capital markets at the New York Stock Exchange.
But as Washington ratchets up the pressure on Beijing with an escalating trade war and accuses Chinese companies of being national security threats, these newly listed companies are being dented by the fallout.
In the past few months, share prices of some Chinese companies have faltered, including Cango, Uxin and Pinduoduo, all of which have lost market value on the Nasdaq exchange. Share prices of several recent listings are down by as much as a third since their initial listing, including Uxin and Pinduoduo.
“If we keep seeing negative returns, then Chinese IPOs will dry up,” said Matthew Kennedy, a senior market strategist at Renaissance Capital in Connecticut, which specialises in public offerings.
“The impact of a trade war is hard to quantify, but it has made investors worry in general about the Chinese economy.”
Watch: Origins and impact of the US-China trade war
The spiralling trade war initiated by US President Donald Trump appears to be aimed at disrupting China’s economy and markets. And while it escalates, the potential for quick rewards from Chinese tech start-ups is slipping away.
Shares of Chinese telecommunications equipment maker ZTE fell nearly 60 per cent earlier this year after the US Commerce Department banned the company from buying American components, punishment for it illegally selling products to Iran and North Korea.
While still a small percentage of total listings, Chinese tech firms have been a boon for the US markets.
Sixteen Chinese companies raised a total of US$5.6 billion in US public offerings this year, Kennedy said. This accounted for roughly 16 per cent of the total amount raised and was the highest in the last 10 years, excluding 2014, when Chinese e-commerce giant Alibaba was listed on the New York Stock Exchange in a US$22 billion IPO, Kennedy said. Alibaba is the owner of the South China Morning Post.
But that rich source of funding could shrink if the US-China trade war continues to intensify, and also add to the challenges American markets are already grappling with as fewer companies decide to go public.
In the last two decades, the number of public companies listed in the US nearly halved. They have also grown much bigger, a troubling sign of unhealthy industry concentration.
Jay Clayton, chairman of the Securities and Exchange Commission, said, “The reduction in the number of US-listed public companies is a serious issue for our markets and the country.”
Watch: Chinese electric vehicle start-up goes up against Tesla
China still remains a source for future IPOs, with 76 start-ups worth over US$1 billion, nearly a third of such high-growth companies worldwide, according to research by CB Insights, a venture capital database.
As companies stay private, most Main Street investors are unable to participate in their growth, potentially leaving lasting effects on the economy, Clayton said. In addition, a large measure of public transparency is lost when CEOs decide to take their companies private.
Elon Musk, the founder of Tesla, announced in a surprise tweet on August 7 that he wanted to take the electric car company private – although on Friday he said he had changed his mind and Tesla would stay public after all.
In a letter to employees outlining his reasons for considering the shift, he echoed the feelings of many CEOs.
“As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla,” he wrote.
“Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.”
In a recent high-profile example, the software company MuleSoft was taken private by Salesforce in a US$6.5 billion acquisition in March, only a year after MuleSoft had gone public.
Private capital is chasing Chinese high-growth start-ups, reducing those companies’ need for IPOs, according to Shruti Gandhi, founder of the San Francisco-based venture capital firm Array Ventures, which focuses on tech investing.
“There is a lot of capital out there looking for return,” Gandhi said. “US investors want to invest in China. Average investors don’t have a way to invest in the China market. When the companies come to the US they seem vetted. There is more trust.”
A growing private market also offers companies a financing alternative. Japanese investment giant SoftBank, which raised a US$100 billion tech fund, has already started thinking about the second US$100 billion fund this year. Sequoia Capital is raising its US$8 billion monster global fund.
Only 39 technology companies went public in the US last year, raising US$10.1 billion, Renaissance Capital said.
Meanwhile, private US tech companies raised US$91.5 billion through private equity and venture capital last year, according to Preqin, a London-based financial information provider.
Watch: Chinese self-driving truck start-up to help at docks
This happened despite a boom market and a healthy economic growth – usually an opportune time for companies to go public.
The US stock market, with its market capitalisation of US$34 trillion, now accounts for about 43 per cent of the world stock market, down from 50 per cent in 2000.
Ibrahim said Chinese companies were expressing interest in tapping into the US market.
Five Chinese companies recently filed with regulators to be listed in the US, including a maker of keyboard software for CooTek smartphones and the content aggregator Qutoutiao.
“We are surprised to see there were still so many Chinese filings,” said Renaissance’s Kennedy, noting other firms’ declining share prices.
For unprofitable tech companies that use future sales for valuation, investors may want to stay away. The trade war might have begun rattling US equity investors, said Kennedy.
“It’s hard to define how the trade war impacts business,” Ibrahim said. “But US institutional investors might be reluctant because of the lack of understanding. That might spook the market.”