Is a market dislocation coming?

Summary

Recent actions by China in Hong Kong and rising geopolitical tensions between China and the US have resulted in the US taking a range of actions including the enactment of the Holding Foreign Companies Accountable Act. One potential consequence of this Act is the forced delisting of Chinese American Depositary Receipts (ADRs) on US exchanges. This is relevant to investors as these stocks represent a significant component of the China exposure in most major indices. In this paper, we investigate which companies are impacted, what the options are for these companies if they are forced to delist in the US, and what the market implications of forced delisting might be. We conclude that the market impacts from this development are likely to be limited due to recent regulatory reforms in China and Hong Kong which makes it easier for these firms to relist there. While we do not expect this development to have any significant market impacts, other developments such as increasing Chinese intervention in Hong Kong are more likely to feed into investor sentiment with consequential market impacts.

Introduction

Tensions between the US and China have again been escalating with a number of significant events occurring in recent weeks. Recently China proposed a national security law1 in Hong Kong which sparked protests and condemnation from governments around the world. A number of key concerns were raised in a joint statement signed by governments of the US, Australia, Canada and the United Kingdom2 . These concerns included that regulation curtails Hong Kong people’s liberties, dramatically erodes Hong Kong’s autonomy and is in contradiction with China’s international obligations under the “One Country, Two Systems” framework set out in the Sino-British Joint Declaration. The consequences of this move were a return of protests and social unrest in HK;in the near term but it also raises longer term concerns about Hong Kong’s viability as an international finance centre.