021 was tough for many Chinese tech firms. While Chinese regulators stepped up the rules and oversight of the internet sector and raised concerns about data security for overseas-listed firms, US authorities highlighted the need to conduct more stringent auditing of Chinese companies listed in the US.
On December 2, the US finalized its new regulations and implemented the Holding Foreign Companies Accountable Act, which allows the Securities and Exchange Commission (SEC) to delist foreign firms if they fail to allow audits for three consecutive years, or are controlled by a foreign government, a policy widely perceived to be aimed at China.
Analysts believe that regulatory pressures in both China and the US will lead to a wave of “homecomings” for US-listed Chinese tech firms. Just a day after the US act came into force, on December 3 Chinese ride-hailing giant Didi announced it would start delisting from the New York Stock Exchange and is planning to list on the Hong Kong Stock Exchange (HKSE) in Hong Kong SAR, China.
There are three paths for Chinese firms already traded on major exchanges to relist in Hong Kong. The most common is a secondary listing. Fifteen Chinese firms listed in the US have already launched a secondary listing in Hong Kong, including Alibaba Group which relisted in Hong Kong in November 2021. The second is a dual primary listing, meaning equivalent primary listings on two capital markets, which was adopted by electric car startups Xpeng in August 2020 and Li Auto in August 2021. The third option is listing by introduction, through which a company can transfer its stock from a foreign exchange to the Hong Kong share register, which analysts believe is the most feasible solution for Didi.
To attract more Chinese tech companies to relist in Hong Kong, the Hong Kong Stock Exchange put in place new rules which came into effect on January 1, 2022. Under the new rules, Chinese tech firms with non-compliant WVR (weighted voting rights or “dual-class” stocks) or VIE (variable interest entity) structures can apply to conduct a dual primary listing in Hong Kong, whereas previously this only applied to secondary listings. The new rules reduce the minimum valuation of companies that can apply for a secondary listing from HK$4 billion (US$513m) to HK$3 billion (US$386m).
As more Chinese tech firms choose a “homecoming” in the future, it will benefit both Hong Kong and the Chinese mainland. First, compared to the US market, the Hong Kong market is far less liquid, a major reason why tech firms prefer the US market as more liquidity leads to higher valuations. But as more Chinese tech firms that represent the future of the economy opt to relist in Hong Kong, it will attract more investment and boost liquidity there.
Second, as the HKSE conducts reforms to attract tech companies, it helps boost its competitiveness and better serves its role of linking the global capital market and the Chinese market, which will further consolidate Hong Kong’s position as the world’s major financial center. Third, as more Chinese tech firms relist in Hong Kong, it brings the Hong Kong financial market closer to the industrial circle in the mainland, which helps strengthen ties between them. Moreover, a more stable regulatory environment in Hong Kong can provide a more stable expectation for companies and their investors, which will allow mainland regulators to establish a stable regulatory framework for new and emerging industries.
Finally, as more Chinese tech firms list on Chinese soil, the impact of potential financial sanctions the US could impose on Chinese firms and industries will be reduced, which will boost the internet security and bargaining power of the Chinese government in the ongoing rivalry between the world’s two largest economies.