Chinese SMEs find success on Wall Street after regulatory hurdle is overcome

Golden Heaven, Top KingWin or Millennium Group may be companies with little notoriety, three Chinese SMEs whose combined annual turnover barely exceeds 100 million dollars, but they are nonetheless now listed on Wall Street.

Like them, dozens of Chinese companies have succeeded in their “IPO”, their entry on the New York Stock Exchange, since January, most of them on the Nasdaq, on a market that is nevertheless in hibernation, which has known several weeks without any IPO.

For Bob McCooey, responsible for the listing of Asia and Pacific companies at Nasdaq, the movement benefits from an agreement between the American and Chinese authorities on a point which posed a dangerous hazard to Chinese groups on Wall Street.

China has previously refused to allow auditors of Chinese companies listed in New York to be audited by the independent accounting organization PCAOB, as provided for in a law passed in the US Congress in December 2020.

Some 248 Chinese entities listed in the United States, with a total capitalization of more than 2,000 billion dollars, were threatened with a forced departure from Wall Street for lack of compliance with the text.

In August, five major Chinese companies had even chosen to leave New York on their own, notably the oil company PetroChina and the aluminum giant Chalco.

An agreement was finally reached between governments a few days later, “which helped to reopen the window of introductions for certain Chinese companies which had put their projects on hold”, explains Bob McCooey.

In addition, last February, the Chinese market policeman, the CSRC, clarified the rules applicable to companies wishing to be listed abroad, an initiative interpreted as a gesture of openness.

Small amounts

In addition to this regulatory thinning, Chinese groups are benefiting from the reopening of the Chinese economy after almost three years of zero-Covid policy. It raised hopes of a vigorous rebound in activity and consumption, at a rate faster than that of Western economies.

“Investors are always on the lookout for” investment opportunities, argues Bob McCooey, which can lead them to “geographically diversify their portfolio and invest elsewhere than in their region”.

Almost all Chinese stock IPOs have raised less than $50 million each. These moderate amounts partly explain this successful series, according to Matthew Kennedy, senior strategist at specialist firm Renaissance Capital.

These small Chinese players also have for them to be profitable, for the most part, an asset in an uncertain context. Those who are not often belong to a popular sector that is popular with investors, such as Xiao-I, which specializes in artificial intelligence, or Healthy Green Group, a chain of organic food stores.

China prohibits direct foreign investment in the capital of national companies in most economic sectors, unless their headquarters are located elsewhere than in the People’s Republic. To circumvent this prohibition, they resort to a complex double mechanism, called VIE on the Chinese side and ADR (or ADS) on the American side.

Concretely, investors who subscribe to these ADRs hold shares of a mirror company of the Chinese group concerned, but not actually a piece of the main entity.

For Matthew Kennedy, the geopolitical context, which has seen tensions increase between China and the United States in recent months, does not weigh on the propensity of Chinese SMEs to join Wall Street.

“That said, I wouldn’t be surprised if the situation changed, because the two governments have already demonstrated their willingness to use financial regulation as a political instrument,” he tempers.

Already, the New York stock exchanges are relatively inaccessible for a Chinese flagship of substantial size, considers the analyst, in part because China “wants to promote its own financial center” and push its companies to be listed on they.

“A small company can be listed in the United States without triggering a political storm.”