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What should investors do as China Mobile, other telecoms companies face US delisting?

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Chad Bray chadwick.bray@scmp.com
·7 min read
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Three of China's biggest telecommunications companies are set to be delisted from the New York Stock Exchange (NYSE) as soon as January 7 as the American bourse seeks to comply with an executive order that bars trading in companies with ties to China's military.

The delistings of China Mobile, China Telecom and China Unicom could foreshadow further US listing exits by Chinese companies, particularly those deemed to have military ties, as President Donald Trump imposes additional barriers for Chinese firms to access to American capital markets.

The executive order is the latest escalation of tensions between Washington and Beijing in the waning days of the Trump administration, but little is expected to change when President-elect Joe Biden takes office on January 20. The Biden administration's foreign policy is expected to be more predictable than President Trump's, but both Democrats and Republicans remain wary of China.

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"The People's Republic of China (PRC) is increasingly exploiting United States capital to resource and to enable the development and modernisation of its military, intelligence, and other security apparatuses, which continues to allow the PRC to directly threaten the United States homeland and United States forces overseas," the November 12 decree said.

The order, which bars American investors from holding shares or securities in nearly three dozen companies identified as being controlled or owned by the Chinese armed forces, prompted major index providers, including MSCI and S&P Dow Jones Indices, to drop a number of the firms from their global bond and stock indices last month.

It comes as global investors have been increasing their weighting of Chinese debt and stocks in recent years as Beijing further opens up its markets to foreign investment and hedge funds and assets managers seek to tap growth in the mainland, particularly as the Chinese economy is expected to recover at a faster pace than many developed markets from the fallout of the coronavirus pandemic.

"The company regrets the aforesaid determination and action of NYSE," China Unicom said in a stock exchange filing on Monday. "The company expects such determination and action of NYSE may have an impact on the trading prices and volume of its ordinary shares and ADSs."

US President Donald Trump has barred Americans from trading or owning securities from 35 Chinese companies that the US claims are owned or controlled by the Chinese military. Photo: AFP alt=US President Donald Trump has barred Americans from trading or owning securities from 35 Chinese companies that the US claims are owned or controlled by the Chinese military. Photo: AFP

Why are these companies being delisted?

The US Department of Defense designated 35 companies between June and December last year as being owned or controlled by the Chinese military and supporting the modernisation goals of the People's Liberation Army by "ensuring its access to advanced technologies and expertise".

Those companies include surveillance camera maker Hangzhou Hikvision, supercomputer manufacturer Dawning Information (also known as Sugon), and Semiconductor Manufacturing International Corporation (SMIC).

On December 29, the US Treasury Department clarified the extent of the executive order, saying US investors were barred from owning exchange-traded funds (ETFs) and index funds of the 35 companies and any of their 50 per cent-owned units and subsidiaries.

How many companies could face delistings?

As of October 2, there were 217 Chinese companies listed in the US with a total market capitalisation of US$2.2 trillion, according to the latest report by the US-China Economic and Security Review Commission.

Only a handful of the designated "Communist Chinese military companies" were listed in the US at the time of the executive order, with oil giant China National Offshore Oil Corporation (CNOOC) among the last to remain listed on an American bourse.

However, a number of high-profile Chinese companies with US listings, including Alibaba Group Holding, JD.com and ZTO Express, have sought secondary listings in Hong Kong as Sino-American relations worsened in the past two years. Alibaba is the parent company of the Post.

More companies are expected to pursue secondary listings closer to home on the Hong Kong stock exchange as a potential hedge against rising tensions, with the option to convert them to primary listings if necessary.

In December, President Trump signed into law a bill that would require foreign companies to provide their audit working papers for US oversight within three years or face delisting in the US. China is one of the few countries that does not allow for US review of audit papers of firms listed on American bourses.

China Mobile is one of three large Chinese telecommunications companies that could see their shares delisted in the US as soon as January 7. Photo: EPA-EFE alt=China Mobile is one of three large Chinese telecommunications companies that could see their shares delisted in the US as soon as January 7. Photo: EPA-EFE

When will the US shares of the telecommunications companies be delisted?

The American depositary shares of China Mobile, China Telecom and China Unicom must be delisted by 9.30am EDT on January 11, but could be suspended sooner, the NYSE said in a market notice on January 1.

Their shares could be suspended from trading as soon as 4am EDT on January 7 depending on whether the Depository Trust and Clearing Corporation will be able to settle trades made on January 7 and January 8 before the order's deadline.

Stock trades typically settle within two days, following a rule change by the US Securities and Exchange Commission in 2017.

The US has designated nearly three dozen Chinese companies as being owned or controlled by the Chinese military. Photo: Handout alt=The US has designated nearly three dozen Chinese companies as being owned or controlled by the Chinese military. Photo: Handout

Do their American shares account for a large portion of their shareholder base?

The US listings are nice to have and give greater prominence to the telecoms companies outside mainland China, but American investors do not account for a large percentage of the shareholders of any of the affected telecoms firms.

China Mobile, which has been listed in the US for more than two decades, has the largest portion of its shareholder base in the US: about 2 per cent of its overall issued share capital as of December 31.

"Since its listing in October 1997, the company has complied strictly with the laws and regulations as well as regulatory requirements of its listing venues, and has been operating in accordance with laws and regulations," China Mobile said in a stock exchange filing on Monday.

US-listed ADSs account for about 1 per cent of China Unicom's total share capital and 0.57 per cent of China Telecom's shareholder base.

Holders of US American shares of China Mobile, China Telecom and China Unicom will be able to exchange their shares for H shares in Hong Kong. Photo: AP alt=Holders of US American shares of China Mobile, China Telecom and China Unicom will be able to exchange their shares for H shares in Hong Kong. Photo: AP

What can holders of their American shares do now?

Investors who own ADSs in China Mobile, China Telecom or China Unicom have two options.

They can sell their shares. (American investors must divest any holdings in similarly designated Chinese companies by November 11.)

Or, they can exchange their American shares for H shares of the companies traded in Hong Kong, as the ADSs are fungible. The Bank of New York Mellon is acting as the depositary for the three telecoms companies and handling exchange requests.

Each ADS equals 100 H shares of China Telecom, while China Mobile shareholders will receive 5 Hong Kong-listed shares and China Unicom will receive 10 H shares for each ADS.

However, analysts said the delisting and conversion of American holdings to H shares could put further pressure on their share prices in Hong Kong.

"Amid increased uncertainty, investors may view these stocks as lacking defensibility and hence might become reluctant to hold the stocks," Citigroup analysts Michelle Fang and Mark Li said in a research note on Monday. "Potential removal from indices such as MSCI and FTSE could also cause large selling of the H shares from global passive and indexed funds."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.