NetEase attributed its decision in part to the need for more funding, which it intends to use to expand its business. But he also clarified that he thinks that the United States is becoming more hostile to Chinese companies, as regulators and legislators are considering new rules that would lead to tighter control. Some restrictions may even make it more difficult for companies to go public or to continue trading in New York.
The issuing of these rules “could cause investor uncertainty for the issuers concerned, including us, the market price of our [US shares] it could be adversely affected and we could be eliminated from the list if we are unable to “meet the requirements,” NetEase wrote in documents filed on the Hong Kong Stock Exchange.
The recognition of NetEase is a sign of how much the relationship between the United States and China has worsened and how much it is at risk for Chinese companies that do not develop a viable backup plan.
Other companies are also considering Hong Kong
“Chinese tech giants view Hong Kong as a middle ground,” said Brock Silvers, Chief Investment Officer of Adamas Asset Management, based in Hong Kong.
He added that the city is “under Chinese control, but still has access to the US dollar”. Unlike mainland China, where there are strict obstacles to capital entering and leaving the country, Hong Kong allows capital to flow more openly. The city’s currency is also freely convertible.
NetEase will not be the last company to look to Hong Kong. About 37 Chinese companies meet the requirements to do so, according to data provider Refinitiv, based on their market capitalization, amount of revenue and ability to comply with regulations.
Baidu and Trip.com declined to comment. But Robin Li, Baidu’s founder and president, recently suggested that his business could turn to Hong Kong if necessary.
Motivations in evolution
But Beijing has eased some of these restrictions in recent years as part of a push to get Chinese companies back home. The country is trying to improve its position as a great technological superpower, and the closer some of its most appreciated companies are, the greater the influence on them that the government can have.
“The political calculation that prompted listed technology companies in China to search for secondary lists was originally Beijing’s desire to bring those companies under its bureaucratic control,” said Silvers. “But it evolved in light of the trade war and subsequent decoupling.”
But that bill would force those companies to clear the list if they couldn’t be controlled for three consecutive years, according to Goldman Sachs analysts.
The potential for tighter regulatory control, however, “will also likely accelerate their dual – listing trend in the [Hong Kong] market, “Goldman analysts wrote in a recent report.
Pressure also comes from the Trump administration. Secretary of State Mike Pompeo praised Nasdaq on Thursday for proposing new compliance rules that could affect Chinese companies, adding that other exchanges should consider similar regulations.
Pros and cons in Hong Kong
“We believe that [Hang Seng] it will undergo a similar change in the coming years and will become an index that primarily reflects the growth of China’s new economy companies, “they wrote.
After all, Alibaba has been a great success story for the city. Hong Kong’s listed shares have risen 19% since they started trading last November.
“Other companies are following suit,” said Hong Hao, chief executive officer and research manager of Bank of Communications International in Hong Kong. “It is worth having a plan B.”
Trump’s announcement, however, did not include any specific sanctions relating to Hong Kong’s financial sector. And for now the Hong Kong dollar peg on the dollar appears to be safe: city officials have reassured investors this week that they have enough reserves to maintain the peg, which keeps the city’s currency trading within a narrow range and stable.
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