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Beijing Devises Plan to Prevent Wave of U.S. Delistings

  • China is currently in the midst of preparing a system to sort U.S.-listed Chinese companies into groups based on the sensitivity of the data that they hold.
  • The move would help provide some clarity as to which sort of Chinese firms face delisting, and which one are likely to remain compliant and unfortunately, the prognosis favors the sort of companies that are not investor favorites.

At a time when the China’s economy is rapidly slowing, its real estate sector which contributes almost a third to GDP is buckling and its leader President Xi Jinping is jostling for an unprecedented third term in office, the last thing Beijing needs is more economic problems.

Long a source of foreign investment, the listing of Chinese firms on American exchanges has been a symbiotic relationship that has benefited both sides of the Pacific.

China gains access to America’s deep and liquid capital markets and global investors have a forum to tap into the growth story and huge markets of China.

But as tensions between Washington and Beijing have grown, so too has this symbiotic relationship, with tit-for-tat actions taken on both sides that culminated in the unceremonious delisting of ride-hailing giant Didi Global (-6.32%).

Since then, Beijing has backed down somewhat, recognizing that now is not the opportune time to create more economic problems for itself and China is currently in the midst of preparing a system to sort U.S.-listed Chinese companies into groups based on the sensitivity of the data that they hold.

A clear concession by Beijing to try and stop American regulators from delisting hundreds of Chinese companies from its bourses, the system is designed to bring some into compliance with fresh U.S. rules that require public companies to allow U.S. regulators to inspect and audit their files.

The move would help provide some clarity as to which sort of Chinese firms face delisting, and which one are likely to remain compliant and unfortunately, the prognosis favors the sort of companies that are not investor favorites.

Technology, telecommunications and other tech-intensive companies are all but certain to fall under Beijing’s categorization of holding “sensitive data” although firms could attempt to restructure their operations to ringfence the data to put it just beyond the reach of U.S. regulators.

Nevertheless, the categorization system that Beijing proposes is a significant concession and would remove hurdles allowing U.S. regulators full access to audits.

“Low risk” data companies are likely to include retailers and restaurant chains, which are not hot on investor lists for growth potential and profitability.

Even ride-hailing applications like Didi Global are likely to fall outside of the bounds of Beijing’s appetite for data transparency.

Time is running out for Chinese firms, and China has a lot more to lose in this game of political brinksmanship than the United States.

With global inflation soaring, the U.S. dollar has been rising against all other major currencies, especially the Chinese yuan, as the monetary policies of the two countries diverge.

China’s economy looks highly unlikely to meet its ambitious 5.5% growth target this year, thanks to repeated cycles of zero-Covid lockdowns and a broad crackdown on many of the country’s most lucrative sectors.

And with the dollar making imports of the necessary fuel and industrial commodities that China depends on to power its industrial machine becoming even more expensive, Beijing can ill-afford for more economic weakness.

Access to global dollar-based capital markets is crucial for China right now, and its more likely than not that Beijing will find a way to resolve a longstanding issue on its companies listed on American exchanges.

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