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Why Chinese companies still head to U.S. for IPOs despite tensions

Drew Bernstein, Co-Chairman of Accounting Firm Marcum Bernstein & Pinchuk LLP, joins Yahoo Finance's Akiko Fujita to discuss the influx of Chinese companies going public in America even as trade tensions rise between the two countries.

Video Transcript

AKIKO FUJITA: Chinese companies are continuing to flock to the US for IPOs despite increasing tensions between Washington and Beijing Chinese companies have raised $2 and 1/2-- or $5.2 billion dollars in US IPOs so far this year. That is more than double the amount raised during the same period last year.

Let's bring in Drew Bernstein. He is the Co-Chairman of accounting firm Marcum Bernstein & Pinchuk. And, Drew, you consult directly with a lot of these companies. What's the attraction to the US right now? Because we have seen huge movements in Asia as well, particularly Hong Kong and Shanghai, in terms of IPOs so far this year.

DREW BERNSTEIN: Well, the Chinese companies today remain competitive IPO candidates that are very desired by investors. And compared to, say, 10 years ago, they have choices today of which markets to choose. There are several markets in China now, including the new STAR Market, Hong Kong, and each of these markets have their own characteristics.

And when you look at the characteristics, as I mentioned earlier, the US in at least my mind still remains the gold standard because it has advantages that the other markets still don't have. For instance, the US market has very deep, diversified sources of capital. Number two, you're able to do add-on rounds, meaning that companies that go public today next year can raise more money. Three, you're raising dollars rather than perhaps renminbi. You get the international recognition from going public on the US exchanges. And to some companies in China, being a US public company actually is an advantage for them running their business in China.

Now with that said, the Chinese markets are becoming much, much more competitive now. They're transitioning from what I would call an approval-based system to a market-disclosure-based system. So going forward, you know, they're going to become much, much more competitive.

AKIKO FUJITA: So, you know, Drew, the thinking behind those who have said that there's going to be this huge exit of Chinese companies listed in the US is the assumption that these companies will not be able to adhere to the stricter auditing requirements that will be in place, essentially just handing over independent audits so they are compliant with PCAOB standards there. And what's your sense on how many of these Chinese companies that are listed in the US currently would actually be able to adhere to those auditing practices?

DREW BERNSTEIN: Well, I mean, the laws right now and the proposed changes have been varying, so it's tough to put exactly your finger on it. But what I can say is that as long as the door is still open for Chinese companies to go public, then they will. You know, I've said if, for some reason, the door is to completely shut on Friday, I'm sure you would see a Chinese company go public on Thursday. So as long--

AKIKO FUJITA: Well, the companies that you are working with that are looking to come to market in the US, is the expectation that they will have to be in compliance with those auditing practice? To your point, I mean, this is still a moving target, but one has to wonder if you are coming to the US, you're certainly going to be a target of that if, in fact, that's-- if that plan is finalized.

DREW BERNSTEIN: Well, all companies, if you are public, have to remain compliant. And the rules I meant for all public companies, not just Chinese companies or US companies.

But looking at from the company's standpoint, they would rather raise the money today because they're in need of funds right now. They've gone through COVID, and they're in need of funds right now. So they'd rather raise the funds today and worry about the changes tomorrow than to wait until tomorrow when the changes are unsure and not be able to raise the money.

And Chinese companies, I would add, are not choosing to come here. It's a two-way street. They're being brought here, right, by the investing community. You know, we've just seen over $3 billion raised by Chinese companies in, what, the last 10 days just between, say, Li Auto and KE real estate. So there's a tremendous desire among US investors to participate in this.

And we've seen with Chinese companies now that they've moved away from this perception of copycat society to really tech tigers, right? You look at companies like TikTok and WeChat. They're being now pursued by US companies.

AKIKO FUJITA: I want to talk about what we've also seen over the last year, which is increasingly these Chinese companies who are listed in the US seek out secondary listings in a place like Hong Kong. We've seen Alibaba do that. We've seen JD.com do that and NetEase. Jefferies identified about 30 companies that are likely to seek out secondary listings. Is that more the scenario that you're looking at? In other words, this doom-and-gloom scenario of all these Chinese companies exiting the US not necessarily going to happen but these Chinese companies looking to have access to capital in both markets, especially because of the tensions that exist between these two countries?

DREW BERNSTEIN: Yeah, I mean, the dual listings, you know, it serves many purposes, but two of the main purposes that companies might do it in this situation are, one, given the environment, it provides an alternative source of capital. So if, for some reason, things were to deteriorate in the US markets for Chinese companies, they would still have access to capital.

The other thing dual listings did interesting-- it was used years ago-- is when you do a dual listing in different markets that have different characteristics, it creates an arbitrage between the stocks so that if the stock is low in one market and high in another market, it creates that arbitrage in order to increase the stock price, hopefully, if you're a good company. It can go the other way too, but that's the concept between it.

So there's some interesting aspects and good things about doing dual listing. And you are seeing more of it right now, and I can understand why, and that's principally because of the environment.

AKIKO FUJITA: Drew Bernstein, good to talk to you. Certainly a very important topic that we will continue to track. Appreciate your time tonight.

DREW BERNSTEIN: Thank you so much for having me.