Chinese Delisting News Raises Concern about $2.4 trillion of Market Cap

China announced early Friday that five of its large state-owned companies will voluntarily delist from U.S. exchanges to avoid complying with U.S. demands for the Public Company Accounting Oversight Board (PCAOB) to be able to audit their books. The PCAOB currently has the right to audit the books of all companies listed in the U.S. except for companies based in China.

The five state-owned companies that announced they are planning to delist from U.S. exchanges are trading lower today by a little more than -3%, although not by enough to indicate any panic. Those five companies are China Life Insurance (LFC), PetroChina (PTR), China Petroleum & Chemical Corp (SNP), Sinopec Shanghai Petrochemical Co (SHI), and Aluminum Corp of China (ACH).

Other closely-watched U.S.-listed Chinese companies are mixed and are generally taking today’s state-company delisting news in stride.  Alibaba (BABA) is down -0.6%, Baidu (BIDU) is up +0.3%, Pinduoduo (PDD) is -1.0%,JD.com (JD) is +0.2%, and Bilibili (BILI) is down -0.5%.

The delisting question is a major problem for the U.S. markets since there are more than 300 Chinese or Hong Kong companies that list their American Depository Receipts (ADRs) on U.S. exchanges, with a total market cap of about $2.4 trillion.  Other large U.S.-listed Chinese companies, other than the state-owned companies, include Alibaba (BABA) with $250 billion in market cap, and Baidu (BIDU) with $48 billion in market cap.

That delisting news indicates that China will not easily give in to U.S. demand for audits and that negotiations may be deadlocked.  However, it is also possible that the delisting of China’s sensitive state-owned companies might make it easier for China to agree to an audit deal once its state-owned companies are out of the picture.

A recently-passed U.S. law requires U.S.-listed Chinese companies to provide the audit information that the U.S. is demanding, or else the companies will be forced to delist in 2024. Congress is currently considering whether to move that deadline up to 2023.

There are reports that China may segment its U.S.-listed companies according to the sensitivity of the information that they handle, allowing less-sensitive companies to perhaps meet the U.S. audit demands and remain listed in the U.S.

The five state-owned companies that announced their delisting have been listed on U.S. exchanges for upwards of 20 years and have market caps ranging from $4 billion for Sinopec Shanghai on the low side, to $135 billion for PetroChina on the high side. There was no word about the fate of the three other companies that China considers to be “national-level Chinese state-owned enterprises,” which are China Southern Airlines (ZNH), Huaneng Power (HNPIY), and China Eastern Airlines (CEA).

The five state-owned companies that announced their delisting plans today will rely on listings in Hong Kong or mainland China going forward.  The U.S. delisting dates were not given, although U.S. investors will likely have plenty of time to sell their holdings or convert to Chinese listings.

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