BREAKING: Chinese Stocks Delisting – Risk Or New Reality? [TFC 120]
This is a special TFC episode as we provide you with our timely analysis of the most recent market news that has triggered a worldwide sell-off: Chinese company Didi’s plans to delist from the US market. This has sparked fears that other Chinese companies listed in the US may also follow suit. Is this a real risk for investors or could this be the new reality going forward? Listen to today’s breaking episode to find out what we think about this.
Why is the news on Chinese stocks delisting from the US market creating so much uncertainty? Is it really such a bad thing, and have you ever wondered why Chinese companies choose to list in the US market in the first place? Get the full picture in this episode and you may have a completely different take after this!
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Reggie: Hey Coconuts. Yes… breaking news. It’s a lot of things going on about China stocks delisting and all the pressure, all the volatility. A lot of you are concerned and I have received a lot of DMs. I mean, even on Telegram, people are talking about it so yes, with all these concerns, I want to share with you my perspective, share with you my thoughts about Chinese stocks delisting in the US market.
Expand Full Transcript
I will say it’s not a risk. It is the new reality. I know, I know. Tag line statements… a lot to unpack. I’m going to share with you my thoughts about how has this changed… how has the relationship between Chinese companies and the US market changed over time and why you are seeing the Chinese government pressuring some of these Chinese companies to list back in China?
That is a lot of interesting stuff to talk about. I’ll try to keep it as simple as possible for you to understand what is the situation and how to play the situation. But yeah, it’s a much bigger ginormous situation that you want to understand… than the media is covering, so yes. Breaking news!
Good morning, everyone! I welcome you to another day with The Financial Coconut. In our podcast, we are debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create a life we love while managing our finances well.
My name is Reggie. I am your host and your Chief Financial Coconut. Today, we’re going to focus a little bit on China’s stocks delisting. To me, it’s not a risk. It is a little bit of a new reality. It’s not as risky as what the media wants to make it sound like, okay? So yeah, welcome back!
Okay… so there’s a lot of angles to look at this thing and I know the mainstream media is always hyping it. “Hor, China pressure the company to delist!” It’s a lot of that kind of stuff where they want to make it sound like the Chinese government is authoritarian. They want to delist the companies. They don’t want it to raise money. They don’t want these companies to prosper and do well. They want to do a lot of this kind of stuff.
But actually, if you think about it, it’s not exactly like what they are saying. They are not trying to get companies not to list. In fact, the Chinese governments have opened up multiple, multiple stock market. I think they have five tiers stock market at this point. New York has like what, NASDAQ, NYSE. Singapore has SGX… do we even have a smaller stock board? I don’t know, but yeah. You get the idea, right?
China is embracing capital markets. It’s embracing this whole stock market reality where you have the financial market movements. You get the volatility. You allow companies to raise money from the public through the markets and what have you. So China is not against financial engineering, or I would say raising money, or even having big companies do well and make money.
China is not against that but China wants it to be in their own soil so it has changed. It has definitely changed so when incentives change, of course strategies will change. That is the reality that we have to embrace with China trying to rise and compete with the US. This is definitely the new frontier of competition, competing for its currency, competing for its markets.
It’s not a new thing. It’s an extension of the ongoing dispute between US and China but it is not anti-business or anti-cooperation or anti-financials. No, they are still open and welcoming retail investors to own Chinese companies but they want you to own it in China. They don’t want you to own it in the US. It’s different, but I would say whatever the mainstream media is saying, it’s not totally baseless.
Do you think Didi is getting pressured by the Chinese government to delist in the US and list back in China? Of course. It’s one of those new age company that recently got listed although the Chinese government said no so Didi is definitely getting political pressure to list back in China, I would say.
But why Didi? Why not the other companies? Because I think that’s the ongoing concern. Is this going to be a slippery slope? Is Meituan, Tencent, Alibaba, JD, everybody going to delist from the US? How is it going to affect me? I think that’s people’s main concern so we will talk a little bit about this as we go along.
I will say why Didi, because firstly, Didi is a relatively young company… relatively young as it listed in the US so it’s not very entrenched in a lot of big indexes. It’s not very entrenched in industry portfolios or institutional portfolios. It is an interesting growth company that China wants to own back in its own soil so you can see it in a more political angle when you look at Didi. It’s more like a… okay, this company is like young and new, not very in the big pockets of the big financial companies yet so the pain will not be as bad. The backlash would not be as crazy. They will not force Alibaba to delist or force Tencent to delist. But they will execute some pressure on Didi, which you see it. They’re going to delist it and they’re going to list Didi back in Hong Kong or back in Shanghai.
I predict… this is a prediction. You can come back to me a few months later and we will see if this works. What I predict is that after Didi delist from the US and go to Hong Kong or Shanghai to list, the institutional investors in Shanghai, in Hong Kong… that means the local capital in China, will bid it up even higher than what happened in the US.
This becomes a carrot and stick situation. You tell Didi “don’t list in the US. Come back home and list at home?” When they listen Hong Kong or list in Shanghai, depending on where they list, China will very likely ask institutional investors or incentivize institutional investors to bid it up. In that sense, it kinda becomes an incentive where some of these other Chinese companies will automatically or be incentivized to say “maybe we can list back in China. Don’t need to list in the US anymore.” It’s a little bit of a carrot and stick. I believe this is where it will be. You can mark my words and we shall see in a few months how does this play out.
Today, I’ve gathered a few points for you. I will not say that they are correlated or very organized. It will be a few scattered points to answer some of your scattered concerns around China’s stock delisting and why I think it is not a risk, but a new reality.
Let’s begin the very first point that I think all of us should know and be aware of is that in the past, Chinese companies list in the US because the Chinese financial markets are very weak, so they have no money essentially to invest in some of these high tech growth companies. It is still seen around the world. All the biggest tech companies or the biggest growth companies… in other words, the companies that want to create a future but now they are still nothing. The financials look like shit and they want to raise money. Where do they go? They all go to the US because the US gives the highest multiple for these kinds of companies.
In other words, if you sell your shares in Singapore, maybe… let’s say The Financial Coconut goes for listing and we are not very profitable but we are growing very fast. If we list in Singapore, we can raise maybe $100 million but if we list in the US like Buzzfeed, we can raise like what, $3-5 billion.
It’s a whole different multiple altogether. The US market has always been that market to go for a lot of these tech companies, high growth… but it has proven that a lot of these tech companies or high growth companies… over time, they become dominant and become massive. So then it becomes a flywheel. As these companies get listed in the US, they make more money because they raise more money with more money. They can go and grow further and they become dominant and then more investors come to try to own them so it becomes a flywheel and more and more people will want to own the US dollar and buy stocks in the US market.
So you see the beauty. I mean, you look at Grab, Shopee, Razer… some of the biggest companies that grow out of Singapore and the ASEAN region, they all list in the US or list in Hong Kong… like Razer list in Hong Kong. Singapore has a very low multiple. Southeast Asia… the multiple is shit so people want to go to these kinds of bigger places to list, but more importantly, you hear the flywheel and that is the flywheel that China wants today because China wants to establish its financial markets now it wants to open up its financial markets, welcome foreign investors and become the dominant currency or at least one of the dominant currency in the world today, which they already are in the physical market. People buy a lot of goods from them. People trade with them a lot, but a lot of them are still using the US dollar as the benchmark trading currency.
China is trying to break out of the US dollar because like we’ve established, if you think about it, what is the strength of a currency? A strength of the currency is how much things this currency can buy. I can create a Coconut currency, but you cannot buy anything other than coconuts. How many people really want to own this currency?
But in Singapore, if you have Sing dollar, you can buy everything. US dollar being the benchmark currency of the world… in other words, every new product, every new innovation, every new resource that is being traded in US dollar is reinforcing US dollar’s strength.
For China, China is very incentivized to grow its own currency now because it don’t want to reinforce the strength of the US anymore. It wants to play its own game. It wants to have its own cycle and there is reason to want to be the dominant currency, because if you’re the dominant currency, all the interest rate is pegged to you. You can tax, you can use sanctions. There’s so many powerful things you can do so China is incentivized to do that and because of the flywheel effect of some of these tech companies, of course, it wants it to be in China, right?
When you bring all these tech companies back to China, people are going to own Hong Kong dollars for now. Eventually, I believe Hong Kong dollars will fade out. There will just be one currency, which is the Yuan. People want to own the Yuan so they can own these stocks and then as these stocks become bigger and the flywheel will… it will keep happening.
At this point in time, Chinese financial institutions and the Chinese capital is very big, very powerful so a lot of Chinese companies actually don’t really need to list in the US anymore. They can maybe get similar or good enough multiple back in China. Of course, that is not yet a reality now, but we shall see as this go along. Will this be the reality where Chinese companies get equally good multiple when they sell their stocks in the market in China, as compared to the US?
The change is that now the Chinese companies, they have a lot of money, they have a lot of capital and they want to invest, they want to grow themselves and what have you. So if you think about it, the underlying incentives for the Chinese companies to go abroad now is changing.
Number one, because there’s the stick: the government don’t want you to do that. Of course, the carrot is also shrinking. The US is no longer as exciting. They want to bring it back to China. The Chinese government have a big incentive to try to bring these very big, popular companies to list in China itself because then that will promote the Chinese financial markets. People want to own again and then the cycle of flywheel happens. These companies that raise a lot of money, they continue to grow and as they get bigger, more big investors want to come in so you see the flywheel growing then Yuan becomes a dominant currency even in the financial markets.
The incentive structures are changing which is why to me, it is not a risk. It is just a new reality. You will see more and more Chinese companies directly list in China or Hong Kong and may avoid the US markets altogether. This is not a very big problem for all of you listening. I know some of you are concerned. I will say why don’t you just buy from Hong Kong and Shanghai? You don’t need to buy in the US.
These days, a lot of brokerages give you direct access to H shares, which are the Hong Kong listed shares and A shares, which are the Shanghai, Shenzhen listed shares. You have direct access already. Why do you need to be concerned? Some people would say “oh, because the liquidity is higher in the US.”
I really have to tell you: you are an extremely small investor. Why do you care about liquidity? Liquidity is a big concern for big funds, for ETFs and for big fund houses. Why? Because they are moving hundreds of millions of dollars and billions of dollars. Every time they want to move these kinds of money, of course liquidity matters.
But for a lot of small time investors like ourselves, you own one stock… $30k, $50k, $100k. Why does it matter as much? Rather than sweat over that liquidity, why not just shift everything to China in itself because you have direct access and fulfill the China dream and also not be so concerned about “what if they delist?” All these… do you really need this extra headache? You don’t really need it.
Which brings me to point number two and that is delisting is a very neat and organized process by now. There’s no real risk in this process and we will talk a little bit more after work from our sponsor.
Delisting from the US market is not new and it’s not like “wah! Suddenly delisting!” No. A lot of companies list and delist, delist and privatize and regroup and then list again. It happens all the time. Of course, some companies they don’t do well, eventually they exit… Myspace. Some of the companies, they do well like Slack, and then they get bought over, they merge. That is also a process of delisting or even LinkedIn being taken down.
You see a lot of these kind of listing and delisting and merging and being bought over and what have you. It’s very normal in the US and it’s a very established process. It’s not like some very risky thing. “Oh my god, what if delist, nobody want to buy?” No, it’s a very established process and the US is probably the most established and organized financial market ever in the world so why so concerned about it? You don’t need to be too concerned.
Specifically for Didi, there’s rumors saying that they’re going to delist at $14. They’re going to buy back the shares essentially at IPO price. Why so concerned? Why so… why, you think China is going to do some foul play? Didi is going to be like “oh, we’re going to buy at $6” because the current trading price is at $6. How many investors will sell back at that price?
You must understand that a lot of these investors, although it’s not all institutional, but they are big institutional investors in the market and they’re not here to play around with you. They’re not here to have fun and kumbaya so they will not anyhow let you delist. If you want to delist at $6, I don’t want. I just hold. I don’t allow you to delist.
If the company in itself cannot buy enough shares, then they cannot delist which is why even in Singapore, when a company wants to delist or when they want to merge, they always pay a premium. They always pay a premium so that the investors will be like “ok lor. Let’s sell it back.” It is a reality and delisting is a very organized process by far. With the recent Didi… I read it somewhere they want to take it back for $10. I’m not sure exactly, don’t mark me on this. But it is what it is. It’s organized and people are gonna pay a premium to get it back.
China also does not want to make it sound like “oh, we are going to do very foul play.” For what? What is their incentive? Their current incentive is to let you feel like we are trustable, we are organized. We play by the markets. We play by the rules. That is what they are trying to make you feel so why would they do a foul play on you? If they will not do a foul play on you, then essentially so what if the Chinese company delist?
They will delist at a fair price or they will delist at a price where you… you will accept or at least the institutional investors will accept because they need to negotiate with these guys which is why Didi is an easy target compared to some of the very established companies like Tencent and JD… all these guys because they have a lot more institutional investors within them. In other words, they have a lot more institutional, political power trying to control the companies and not so easy to delist on the market. Didi is easier. Easy target. Cheap, nobody wants it, everybody throw it… okay, let’s delist it and bring it back and fry it up.
So delisting is a very common thing. It happens again and again and again, nothing to be too concerned about. I would say a lot of you, probably when you’re thinking about it… “what if the share price that I buy goes below?” That’s a different situation, whether will it go below? At what price do you buy an IPO? Are you chasing the price up in IPO times?
Either way, as long as you are an investor, you are subject to the market risk. But I will say it will not be a situation where it’s like a shit price, they just want to force your hand on it because it’s not so easy to begin with. There are very organized structures then some people will be like “oh, what if they just bypass the whole ADR (American depositary receipt) structure and just say ‘this is illegal’ and close it?” Then you are very sure that there’s a war happening.
It’s not so easy. There’s a lot of pressure. It’s not so easy to not just follow rules… not just not follow rules. There are a lot of political pressure, geopolitical pressure, military pressure and even internal pressure. You think the Chinese government is infallible? Internally, they have a lot of problems and they have a lot of factions so nobody wants to mess this up. Everybody just want to do an organized fashion and list it in China so that they can get the Chinese stock market and the financial market move in a flywheel effect. That is my view.
Point number three that I think you should know is that the recent share price dip, it looks quite serious but it is highly likely a momentum issue, not so much a fundamental problem. I was saying about Omicron or O-muh-cron… Rakaesh and Anthony were joking about me on their show, TFC Market Updates. You should check it out on TFC Stock Geekout but yes. Whatever it is, whatever name it is, it’s probably not the main problem here.
I would say interest rates very likely will move up because inflation looks like it’s not transient. It looks like it’s going to stay so with that in mind, it is essentially going to become a very big pressure point for the Fed to arrange their interest rates in a higher fashion to dampen this whole inflation problem. With that, it’s definitely an underpinning factor and then also the other underpinning factors… a lot of fear in the market, people are not sure about what’s going on so why not? In an increased uncertainty environment, you will see volatility move higher and you will see more money moving out. That is the reality.
I would say the recent share price decline with all these Chinese companies, it’s a few things. It’s the potential increase in interest rates, it’s the potential uncertainty of what is going to happen in the broad market, but also with the US-China situation. People are not sure what is the situation now so with a lot uncertainty, people price that in but at the same time, when you sell, it’s a falling knife which is why it’s called a momentum situation.
It’s very well documented that with a lot of robots, with a lot of computers being in this game, as long as there’s a sell, the sell moves a lot. It just keeps selling because it just keeps triggering all the algorithm to sell. As long as there’s a buy and it keeps triggering a lot of buy so you see the volatility of the market in itself… very, very high compared to maybe in the past.
So I would say this is highly likely a momentum issue. In other words, it’s a hype issue. Everybody do then you do lor. The algorithm kind of follows along. The sell becomes quite painful and quite serious, which I hear you and I know that it’s a problem that a lot of you are facing because Christmas, CNY (Chinese New Year) coming then you see all the share price come down, you’re very unhappy.
I know. I get it, but this is the reality of the market. There are a lot of things that you cannot control. All the general ideas that govern your investment ideology, they stand: diversified, invest long-term, investing in what you know. All those things say until sian (sick and tired) already but those are the realities of being in investments. You don’t want to over-concentrate your portfolio in the Chinese companies. If not, you get the brunt of some of these things. Sometimes they don’t make sense, because it’s a momentum situation. There are no real change in the fundamentals.
The Chinese markets are getting better and better. They are making more money in the hard economy and also, a lot of these Chinese companies are serving the market very well. You see the business growing, but their share price come down. It’s not about fundamentals here. It’s really about the news, about the uncertainty and about the potential increase in interest rates. Of course, the momentum trade downwards. So very likely, if you start to see a more organized exit for Didi in the next few weeks, you may see a very fast run-up or at least run to a more healthy place for some of these other Chinese tech companies. Of course, maybe the news cycle will go into. They will start talking about other things then you will be… also be better.
Yes, I hope that these three points give you a little bit more clarity about the China’s stock delisting situation now. It’s not really a risk. I believe it’s the new reality and I’m going to sum up the three points.
Number one is Chinese companies used to list in the US because in an era where they had no money, they want to get a higher multiple, right? Same with Grab, Shopee, Razer. The local markets are not giving them the kind of multiple, so they want to list in the US. But China now wants to grow its own stock market, it want to grow its own financial markets. What’s the best way? Bring some of the high growth tech companies that they really like and the market really likes back home. That is the new reality and Chinese companies are less and less incentivized to list abroad now because locally, I believe that their capital is ready and are able to give them a decently good enough multiple that you don’t need to go to this whole process to list in the US any more.
Number two is that the delisting thing is a very neat and organized process, very well documented so far. I don’t know why is there a risk for delisting. It’s very well documented. It’s a very organized process. The US is a very established financial market and China has no incentive to try to look like a foul player at this point in time.
Point number three is as share price dip, it creates a momentum to sell. I would say different people have a different pain-bearing ability and with the market having a lot of algorithms, a lot of robots at play, the trigger is quite serious. The dip is definitely a lot more serious than the fundamentals. I don’t know what’s changed in the fundamental. Fundamentals look pretty much the same for me, at least for a lot of the Chinese companies. I would say Alibaba may have a little bit of change, but that one we can have a discussion another time, but broadly speaking, I believe this is a momentum situation. Do not be alarmed if you are a more fundamental investor and you are here for the longer term. But short term is very painful. I know, I hear you. So I hope you learnt something useful today. See ya!
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Okay, because you guys asked, I try to give you what I can for this period and I really think it’s over-hyped… not a real problem at all. If you have any other questions that you want us to do, I cannot promise you that I will always do breaking episodes, but hey, if there are some things that are concerned enough and you think it’s important to you, please let me know and then we can have a good discussion.
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