Potential Impact of U.S. Delisting Rules on the Valuation of Chinese Companies

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U.S. delisting rules have a direct and indirect profound impact on the valuation of Chinese companies. Direct impacts include fluctuations in market confidence and changes in liquidity. For example, according to a 2022 U.S. Congressional report, 261 Chinese companies faced a trust crisis due to opaque capital structures and insufficient information disclosure. This trust crisis directly lowered investors’ valuation expectations for these companies. Indirect impacts are reflected in restricted capital market choices and increased regulatory costs. Although some companies have a low proportion of U.S.-listed depositary shares, such as CNPC with only 0.49%, in the long term, these companies still need to address valuation changes through strategic adjustments, optimizing business layouts and financing channels.

Overview of U.S. Delisting Rules

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Main Content of U.S. Delisting Rules

U.S. delisting rules are mainly divided into voluntary delisting and mandatory delisting types. Voluntary delisting is typically initiated by the company itself, requiring shareholder approval and submission of Form 25, with a notice issued 10 days before delisting and registration terminated 90 days after delisting. Mandatory delisting is enforced under the Holding Foreign Companies Accountable Act (HFCAA), where companies that fail to pass the Public Company Accounting Oversight Board (PCAOB) audit for three consecutive years trigger the delisting process. The following are the main content and enforcement standards of U.S. delisting rules:

These rules aim to regulate the delisting process of companies while protecting investor rights.

Special Requirements for Chinese Companies

For Chinese companies, U.S. delisting rules have some unique requirements. Delisting methods for U.S.-listed companies include Rule 12h-6 delisting, termination of registration, and privatization. Among them, termination of registration and privatization are common delisting methods for Chinese companies, while Rule 12h-6 delisting is relatively rare. The following are specific requirements for Chinese companies:

• If a company chooses not to maintain its U.S. listing status, it typically delists through privatization.
• Privatization delisting is generally conducted under Rule 13e-3 of the Securities Exchange Act of 1934, initiated by founders, controlling shareholders, or management.
• The key to terminating registration lies in controlling the number of registered shareholders. If a company does not take market measures, it may need to fulfill registration obligations again.

These requirements pose higher challenges to the capital structure and financing methods of Chinese companies.

Trends in Recent Changes to Delisting Rules

In recent years, U.S. delisting rules have shown a trend toward stricter enforcement. In 2023, a total of 47 companies were delisted from the U.S. stock market, of which 44 were mandatory delistings. This reflects the regulatory authorities’ emphasis on the quality of listed companies. The core objectives of the new rules include:

• Improving the overall quality of listed companies.
• Clearing out “zombie shells” and “bad actors.”
• Expanding diverse exit channels to protect investors of delisted companies.

Additionally, as of April 30, 2023, 24 Chinese companies had been locked for delisting, with 9 having completed the delisting process. These changes indicate that delisting rules are gradually moving toward standardization and transparency.

Direct Impact of U.S. Delisting Rules on the Valuation of Chinese Companies

Fluctuations in Market Confidence

Market confidence is a significant factor affecting company valuation. The implementation of U.S. delisting rules often triggers investor concerns about the future development of Chinese companies. Especially when companies face the risk of mandatory delisting, the market may react quickly, leading to significant stock price fluctuations.

For example, in 2022, some Chinese companies saw their stock prices drop by more than 20% in the short term due to failure to meet the audit requirements of the Holding Foreign Companies Accountable Act. This fluctuation not only affected the companies’ market value but also weakened investors’ long-term confidence.

Additionally, fluctuations in market confidence may lead investors to lower their valuation expectations for the entire industry. Many investors tend to view the delisting risk of individual companies as an industry-wide issue, adopting a more cautious investment stance toward other Chinese companies.

Impact of Liquidity Changes on Valuation

Liquidity is a key feature of capital markets. The enforcement of U.S. delisting rules may significantly reduce the stock liquidity of Chinese companies. A decline in liquidity typically leads to the following consequences:

• Increased Transaction Costs: Investors may face higher bid-ask spreads when buying or selling stocks.
• Valuation Discount: Stocks with insufficient liquidity are typically assigned lower valuations by the market.

For example, some companies, after delisting, move to over-the-counter (OTC) markets, where their stock trading volume significantly decreases, leading to further valuation declines. According to statistics, the average liquidity of delisted companies in 2023 dropped by more than 40%. This change poses challenges to companies’ financing capabilities and capital structure optimization.

Adjustments in Investors’ Risk Preferences for Chinese Companies

U.S. delisting rules also affect investors’ risk preferences. Many international investors, when evaluating Chinese companies, pay greater attention to their compliance and information disclosure quality. The increased risk of delisting may prompt investors to reassess their portfolios’ exposure to Chinese companies.

• Institutional Investors: Some large funds may reduce allocations to Chinese companies, shifting investments to lower-risk markets.
• Retail Investors: Retail investors may exit the market due to information asymmetry.

This adjustment in risk preferences not only affects companies’ valuations but may also alter the flow of funds in capital markets. For Chinese companies, restoring investor confidence through improved transparency and strengthened compliance management becomes a critical issue.

Indirect Impact of U.S. Delisting Rules on the Valuation of Chinese Companies

Restrictions on Capital Market Choices

U.S. delisting rules have a significant impact on the capital market choices of Chinese companies. Some companies, due to increased regulatory burdens and limited trading volumes, choose voluntary delisting. For example, five state-owned enterprises announced voluntary delisting, attracting market attention. These companies have a small proportion of American Depositary Receipts (ADRs), so delisting has a limited impact on their valuation. However, most Chinese concept stocks still consider the U.S. a primary listing venue. The U.S. market has long provided financing convenience and brand enhancement opportunities for Chinese concept stocks, particularly for technology-driven companies.

Nevertheless, the strict enforcement of delisting rules restricts companies’ choice of markets. If a company loses its U.S. listing status, it may need to turn to the Hong Kong or A-share markets. This shift may lead to changes in valuation systems, especially for technology companies, whose valuations may be affected by differences in market structures.

Pressure from Increased Regulatory Costs on Valuation

The implementation of U.S. delisting rules increases the regulatory costs for Chinese companies. Companies must meet the audit requirements of the Public Company Accounting Oversight Board (PCAOB) while addressing differing regulatory standards between China and the U.S. This dual compliance pressure may lead to rising operating costs, which in turn negatively affects valuation.

Additionally, increased regulatory costs may weaken companies’ profitability. Investors typically view high regulatory costs as a risk factor, lowering their valuation expectations for companies. This impact is particularly significant for small and medium-sized enterprises, which have limited resources and struggle to meet multiple regulatory requirements simultaneously.

Changes in Corporate Financing Channels

U.S. delisting rules also alter the financing channels of Chinese companies. After delisting, companies may lose access to capital support from the U.S. stock market. Some companies choose to turn to the Hong Kong stock market, but the liquidity and valuation levels of the Hong Kong market differ from those of the U.S. market.

For example, some companies maintain liquidity through private financing or bond issuance after delisting. However, the costs of these financing methods are typically higher than those of public market financing. Companies need to adjust their capital structures and explore diversified financing channels to address the funding pressures brought by delisting.

Notably, recent positive progress in China-U.S. audit issues may provide companies with more options. This development could influence future delisting situations, offering new possibilities for companies’ capital market strategies.

Case Studies: Actual Impact of U.S. Delisting on the Valuation of Chinese Companies

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Alibaba: Short-Term Impact of Delisting Rumors on Stock Price and Valuation

Alibaba faced market attention due to delisting rumors. In 2022, U.S. regulators strengthened audit requirements for Chinese concept stocks, and Alibaba was included on a potential delisting list. After the news was released, Alibaba’s stock price fell by more than 10% in the short term. Investors’ concerns about the company’s future uncertainty led to a decline in valuation expectations. Fluctuations in market confidence directly affected Alibaba’s market value performance. Although the company clarified the delisting rumors through public statements, stock price recovery still required time. This case demonstrates the significant short-term impact of U.S. delisting rules on corporate valuation.

China Mobile: Performance in the Hong Kong Market After Voluntary Delisting

China Mobile voluntarily delisted from the U.S. stock market in 2021 and listed on the Hong Kong stock market. After delisting, the company’s performance in the Hong Kong market remained stable. Data shows that China Mobile’s stock price rose by more than 7% on its first trading day in Hong Kong. By optimizing its capital structure and enhancing business transparency, the company successfully attracted the attention of Hong Kong investors. Voluntary delisting allowed China Mobile to escape U.S. regulatory pressures while gaining new financing opportunities in the Hong Kong market. This case illustrates that voluntary delisting does not necessarily negatively impact corporate valuation, with the key lying in strategic adjustments.

CNPC: Successful Experience in Capital Structure Adjustment After Delisting

After delisting from the U.S. stock market, CNPC focused on optimizing its capital structure. The company improved financial stability by reducing debt ratios and increasing shareholder equity. After delisting, CNPC also strengthened its business layout in the domestic market, further consolidating its industry position. Data shows that CNPC’s profitability significantly improved after delisting, with shareholder returns also increasing. This case demonstrates how companies can address the challenges of delisting through capital structure adjustments while achieving stable valuation growth.

Strategic Recommendations for Chinese Companies Facing U.S. Delisting Rules

Adjusting Capital Structure to Reduce Valuation Fluctuations

Adjusting the capital structure is an important strategy for Chinese companies to reduce valuation fluctuations when facing U.S. delisting rules. By optimizing the debt-to-equity ratio, companies can enhance financial stability and boost investor confidence. For example, some companies reduce financial leverage by lowering debt ratios, mitigating risks from market fluctuations. Additionally, increasing shareholder equity is an effective approach, enhancing companies’ risk resistance and providing greater flexibility for future capital operations.

When adjusting capital structures, companies should develop specific plans based on their industry characteristics and market environment. For example, CNPC significantly improved profitability and shareholder returns by optimizing its capital structure after delisting. This successful experience shows that reasonable capital structure adjustments can effectively address valuation pressures caused by delisting.

Optimizing Business Layout to Enhance Market Confidence

Optimizing business layout is another key strategy for Chinese companies to address delisting rules. By focusing on core businesses, companies can enhance market competitiveness and boost investor confidence. Finding more suitable markets and financing channels is also an important direction for optimizing layouts. For example, some companies shift their business focus to domestic or other international markets after delisting to mitigate regulatory risks in the U.S. market.

A successful case of optimizing business layout is China Mobile. After voluntary delisting, the company focused on business development in the Hong Kong market and attracted more investors by enhancing business transparency. Data shows that China Mobile’s stock price rose by more than 7% on its first trading day in Hong Kong, fully demonstrating the positive role of optimizing business layout in enhancing market confidence.

Additionally, companies can enhance market competitiveness through technological innovation and product upgrades. For example, technology companies can increase R&D investment and launch products with greater market appeal, thereby gaining higher valuations in capital markets.

Exploring Diversified Financing Channels to Address Liquidity Changes

The implementation of U.S. delisting rules may lead to a decline in corporate liquidity, making it critical to explore diversified financing channels. Companies can maintain liquidity through Hong Kong market financing, private financing, or bond issuance. For example, Huawei holds over $40 billion in cash and equivalents through internal financing and overseas market bond issuance, demonstrating strong self-sustaining capabilities. In 2019, Huawei issued €2 billion in bonds to supplement working capital and repay debt. This shows that diversified financing channels can effectively alleviate liquidity pressures.

Xiaomi’s financing strategy is also worth noting. The company initially relied on venture capital and private equity funds, raising about $5.4 billion through its 2018 Hong Kong listing. After listing, Xiaomi further optimized its capital structure through bank loans and supply chain financing. These diversified financing methods helped the company maintain stable development amid capital expenditure pressures.

When exploring financing channels, companies should choose methods suited to their needs. For example, technology companies can explore innovative financing models, such as Drip Irrigation or RWA models, to meet funding needs at different stages.

Strengthening Compliance Management to Reduce Regulatory Costs

Strengthening compliance management is a critical strategy for Chinese companies to address U.S. delisting rules. By improving compliance levels, companies can effectively reduce regulatory costs while enhancing market confidence. The following are key measures for compliance management:

• Improving Information Disclosure Quality
  Companies need to ensure the transparency of financial reports and operational data. By adopting internationally recognized accounting standards, companies can reduce regulatory risks due to information asymmetry. Many companies choose to engage third-party audit firms to ensure data accuracy and credibility.
• Applying Compliance Technology
  Compliance technology (RegTech) is a rapidly growing field in recent years. By using artificial intelligence and blockchain technology, companies can automate compliance processes, reducing labor costs. For example, the global compliance technology market reached $15.2 billion in 2022, with a compound annual growth rate of 53%. Asia has 142 compliance technology companies, accounting for 25.6% of the global total. These data indicate that the application of compliance technology can significantly improve compliance efficiency.

The application of compliance technology not only reduces operational costs but also minimizes fines and legal risks due to non-compliance.

• Strengthening Cross-Border Regulatory Cooperation
  Companies need to actively communicate with regulatory authorities to ensure compliance policies meet international standards. By collaborating with the Public Company Accounting Oversight Board (PCAOB), companies can reduce delisting risks due to audit issues. Cross-border cooperation also helps companies better understand regulatory requirements in different markets.

Economic Benefits Analysis of Compliance Management

These data indicate that compliance management is not only a necessary means for companies to address delisting rules but also an important way to enhance competitiveness. By reasonably utilizing compliance technology and strengthening cross-border cooperation, companies can reduce regulatory costs while improving market competitiveness.

When strengthening compliance management, companies should choose strategies suited to their industry characteristics and market environment. For example, technology companies can prioritize compliance technology, while traditional industries should focus on information disclosure and cross-border cooperation.

By strengthening compliance management, Chinese companies can better address the challenges posed by U.S. delisting rules while laying a solid foundation for future international development.

U.S. delisting rules have a profound impact on the valuation of Chinese companies. Direct impacts include market confidence fluctuations and liquidity declines, while indirect impacts are reflected in restricted capital market choices and increased regulatory costs. Companies need to address these challenges by adjusting capital structures, optimizing business layouts, and strengthening compliance management.

In the future, Chinese companies have significant development potential in global capital markets. It is expected that by 2025, the Hong Kong IPO market will see about 80 new listings, with a fundraising scale of HK$130 billion to HK$150 billion. Large A-share companies, leading mainland enterprises, and technology-driven companies will be the main players. Recently, CATL and Hengrui Medicine achieved oversubscription multiples of 151 and 455 in the Hong Kong market, respectively, demonstrating strong investor enthusiasm.

The growing attractiveness of the Hong Kong market provides Chinese companies with more options. Meanwhile, companies need to adjust their international strategies and explore diversified financing channels to adapt to the changing trends in global capital markets.

FAQ

1. How significant is the impact of U.S. delisting rules on the valuation of Chinese concept stocks?

The impact of U.S. delisting rules on the valuation of Chinese concept stocks varies by company. Mandatory delisting may lead to significant short-term stock price fluctuations and liquidity declines. Companies that voluntarily delist, if able to adjust capital structures and optimize business layouts, may achieve more stable valuations in other markets.

2. How should companies choose a suitable capital market?

Companies need to select capital markets based on their characteristics. Technology-driven companies may prioritize the Hong Kong market, which is more favorable to high-growth enterprises. Traditional industry companies may choose the A-share market to leverage its high liquidity and investor base.

Tip: Companies should comprehensively consider market liquidity, valuation levels, and regulatory requirements.

3. Can companies still attract international investors after U.S. delisting?

Yes. By improving information disclosure quality and strengthening compliance management, companies can still attract international investors. For example, China Mobile’s performance in the Hong Kong market proves that transparency and stable business development are key to attracting investors.

4. Can the Hong Kong market fully replace the U.S. market?

The Hong Kong market cannot fully replace the U.S. market. The U.S. market offers higher liquidity and a global investor base. The Hong Kong market is more suitable for Asian investors, particularly those with high acceptance of Chinese companies. Companies need to choose markets based on strategic goals.

5. How can companies reduce risks from delisting?

Companies can reduce risks through the following methods:

• Optimizing Capital Structure: Reduce debt ratios to enhance financial stability.
• Strengthening Compliance Management: Ensure transparent information disclosure to lower regulatory risks.
• Diversifying Financing Channels: Explore Hong Kong market financing, private financing, and other methods to maintain liquidity.

Note: Developing proactive strategies helps companies transition smoothly.

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