Where will China's concept stocks go under domestic and foreign policy changes?
Text / Luo Zhiheng Fang Kun
Issued in the 1007th issue of 2021.8.9, China News Weekly
Since July, the volatility of concept stocks listed in the United States has intensified, and the trend has lagged significantly behind the market benchmark index.
The S&P Bank of New York Mellon China ADR Index, which reflects the trend of China's concept stocks, has fallen 17.9% in July, while the S&P 500 and Nasdaq have risen by 2.3% and 1.2% respectively in the same period.
Domestic development and security are coordinated, and industry policy adjustments have led to a sharp correction in education stocks, game stocks, and Internet-related Chinese concept stocks.
Especially after the introduction of the "double reduction" policy in the education industry, the S&P China ADR Index fell by 15.8% from July 21 to 27. New Oriental and Good Future in the after-school training industry fell by more than 70% in the same period. Bilibili's cumulative decline over the same period has exceeded 20%.
The sharp correction of China's concept stocks was mainly due to the tightening of internal and external regulatory policies and the re-cognition and adjustment of China's development logic by overseas investors.
In the face of increasingly stringent regulatory requirements from the regulatory authorities of China and the United States, China Concept Stocks can be described as "internally and externally under pressure."
Why have China's concept stocks plummeted recently?
Against the background of anti-globalization and global trade frictions, the volatility of Chinese concept stocks has increased significantly.
During the Trump era, Chinese concept stocks were used as a bargaining chip option in the US financial game against China. US regulatory authorities continued to strengthen restrictions on the audit of Chinese concept stocks and listing standards. Policy risks led to large fluctuations in Chinese concept stocks.
Recently, China's concept stocks have fallen sharply again, and they have been intensively sold. This is mainly due to the decline in the risk appetite of overseas investors, which can be analyzed from two dimensions: the surface and the deep level.
The apparent reason lies in the stringent industry regulatory policies and the incidental impact of Sino-US relations.
On the one hand, the introduction of the "double reduction" policy in education has not only subverted the operation and profit model of Chinese after-school training companies, but also has the risk of insecure listing status in the after-school training.
Previously, the regulatory authorities publicly reviewed Didi’s listing in the United States in accordance with the Cybersecurity Law, marking that Internet companies have entered an era of strong supervision over data security.
Overseas investors' worries about the expansion of China's supervision have dragged down the performance of concept stocks in other industries.
On the other hand, the Sino-US game has developed in-depth from trade to finance, technology and other fields, and short-term disturbances have become more frequent.
During the Anchorage in March and the Tianjin China-US Dialogue in July, China's concept stocks were the first to bear the brunt, becoming assets suppressed by uncertainty, and both experienced significant declines.
The deep-seated reason lies in overseas investors' re-understanding of China's current development logic.
The logic of China's development is undergoing significant changes, that is, from efficiency to fairness, from speed to security, and from getting rich first to getting rich together. After the realization of a comprehensive well-off society, common prosperity has become the main dominant logic.
But as Yuan Jiajun, secretary of the Zhejiang Provincial Party Committee who is building a demonstration zone for China's common prosperity, said, "Common prosperity is a differential wealth based on universal prosperity. It is not equal wealth and simultaneous wealth, nor is it equalizing the rich and the poor, killing the rich and helping the poor."
The starting point of regulating the education industry in China is not to suppress individual enterprises. The purpose of regulating the education industry is to promote the effective allocation of education resources and protect the needs of the people's livelihood, and will not expand at will.
It takes time for overseas investors to adjust their policy expectations. It is easy to misunderstand before a consensus is reached, risk appetite drops suddenly, and panic is easy to spread and then cause a big drop.
The overreaction of the market amplifies the short-term impact, while ignoring the fundamentals of China's economic stability and improvement. The foundation for the development of China's capital market remains solid.
The significance of Chinese concept stocks to China
From a historical perspective, overseas listings are the product of a special period in the development of the capital market, and have played three major roles in expanding financing channels, improving the quality of listed companies, and promoting technological development.
First, listing overseas facilitates corporate financing and uses international capital to participate in economic globalization cooperation.
In the initial stage of the development of the domestic capital market, the regulatory requirements for issuers were strict, the coverage of listing was relatively narrow, and the financial real estate and industrial traditional industries dominated the market structure.
In June 1993, Tsingtao Brewery officially listed in Hong Kong, becoming the first H-share company to be listed directly overseas.
In 1994, Huaneng Power International became the first Chinese company to go public in the United States.
Second, the domestic market also indirectly benefits from the advanced systems in overseas markets, which in turn promotes the improvement of listed companies' information disclosure, the improvement of accounting quality, and the improvement of corporate governance structure.
Third, in the early stage of the development of the domestic capital market, there was a lack of soil for cultivating start-up technology-based enterprises, while the multi-level capital market in developed countries and the development of real economy technology formed a virtuous circle.
Overseas listing and financing have provided a foundation for a large number of Internet technology companies in China to become bigger and stronger, and promote the development of the new economy.
Among the Chinese concept stocks of overseas listed companies, optional consumer and information technology companies account for more than two-thirds of the market value. The top three market capitalizations are all Internet companies, with a market value of more than 100 billion U.S. dollars.
From the current point of view, China Concept Stocks are an important carrier for the two-way opening of the capital market.
On the investment side, the status of China Concept Stocks in overseas markets has improved, and it has become the main choice for global investors to allocate Chinese assets.
Divided by listing location, Chinese concept stocks are mainly listed in the United States.
According to wind statistics, as of the end of July this year, the total market value of 285 Chinese concept stocks listed in the United States was approximately US$1.80 trillion, accounting for more than 3% of the total market value of US stocks.
On the financing side, the current Chinese companies' financing in the United States has rapidly recovered after being affected by Sino-US frictions and the epidemic.
From January to July 2021, a total of 38 Chinese companies went public in the United States, which has exceeded the total number of last year.
Changes in the regulatory environment for Chinese concept stocks
In recent years, under the trend of anti-globalization, the high pressure of overseas supervision has intensified the volatility of Chinese concept stocks.
The Trump administration is pushing against globalization and gradually spreading from trade frictions and technological restrictions to financial restrictions. It is studying measures to restrict the flow of U.S. investment to China, including requiring the delisting of Chinese concept stocks listed in the U.S. and restricting U.S. government pension investment. .
In September 2019, rumors of "US restrictions on investment in China" disrupted the market, triggering a sharp drop in China's concept stocks.
In November 2020, Trump signed an executive order prohibiting US investors from investing in listed companies related to the Chinese military, which triggered the removal of relevant targets by international index companies.
In December 2020, Trump signed the "Foreign Company Accountability Act (HFCA)". According to the Act, Chinese concept stocks that do not meet regulatory requirements such as reviewing audit manuscripts may face forced delisting by the exchange. The US President’s financial market work The group listed a number of suggestions for strengthening supervision.
In June 2021, Biden will continue to expand the scope of sanctions under the “investment ban”. Many index compilation companies such as MSCI and FTSE Russell will exclude a series of Chinese companies from the index.
On July 30, the U.S. Securities and Exchange Commission (SEC) issued a statement that increased the information disclosure requirements for Chinese companies listing in the U.S., specifically requiring disclosure of whether their listing status faces national regulatory policy risks.
From the increase in disclosure requirements to the increase in investment restrictions, the overseas regulatory pressure faced by China Concept Stocks may be further escalated.
The tone of China's deployment of strengthening the supervision of China's concept stocks is different from that of the United States.
The differences in the legal systems between China and the United States, coupled with the dislocation of the capital market development stage, have brought many inconveniences to the supervision of listed companies in China and the United States.
In this regard, China has taken a more pragmatic attitude, adhered to a problem-oriented approach, and promoted supervisory cooperation.
The US is increasingly giving financial supervision a political game color.
With the orderly advancement of China's capital account opening, the capital markets of China and the United States have become closer together, and more and more companies, investors, and financial institutions are participating in each other's markets. Strengthening regulatory cooperation is an inevitable choice.
At present, direct overseas listings, that is, H shares, are still under the supervision of the China Securities Regulatory Commission, while indirect overseas listings, that is, the establishment of a red-chip structure, have not been subject to substantial domestic supervision.
Article 224 of the New Securities Law of 2020 stipulates that "The overseas issuance of securities or the listing and trading of their securities overseas shall comply with the relevant regulations of the State Council."
In the future, the competent authorities and responsibilities for the supervision of indirect listed Chinese concept stocks have yet to be clarified, and cross-departmental supervision and coordination will be further strengthened.
The starting point for China to strengthen the supervision of overseas listings is to prevent risks, ensure safety, and promote development.
On July 6, the Central Office and the State Council issued the "Opinions on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law."
The opinion puts forward “conscientiously take measures to deal with risks and emergencies of Chinese concept stock companies, and promote the construction of relevant regulatory systems”, and also mentions the improvement of relevant regulations on cross-border data security and confidential information management.
On July 30, the Politburo meeting proposed "improving the regulatory system for overseas listing of enterprises."
The measures to strengthen the supervision of overseas listings are the new era in response to changes in internal and external trends. Internally, under the guidance of anti-monopoly to promote competition and prevent the disorderly expansion of capital, the supervision of overseas listed Internet platform companies needs to be further improved; In addition, frictions in the economic and financial sectors have made the regulatory environment facing overseas listings of concept stocks increasingly severe. It is indeed necessary to take precautions to prevent the financial risks of forced delisting by US administrative orders.
Improving the capital market system is a fundamental strategy to prevent financial risks, and it needs to give consideration to both enterprise development and economic security.
The domestic capital market has relatively high institutional thresholds at the beginning of its development, and companies that have financing needs but cannot meet the requirements have to go overseas, and the regulatory system also leaves a certain space for overseas listings, creating conditions for the development of emerging industries .
Overseas listing of companies can be controlled by establishing agreements or red-chip structures. Although this facilitates corporate financing, it also creates a hidden danger of regulatory vacuum.
Nowadays, the reform of the domestic capital market has been implemented continuously, with the establishment of a system and zero tolerance, the substantive threshold for listing has been lowered, and the crackdown on securities violations has been intensified.
While making up for the shortcomings in the supervision of overseas listed companies, it is also necessary to establish a smooth return system for overseas listed companies in order to coordinate the promotion of financial opening and financial security, to maintain the bottom line of preventing financial risks, and to enhance the quality and effectiveness of financial services to the real economy. .
What is the way out for China's concept stocks in the future?
Way out 1: Seek a secondary listing to diversify risks.
Multiple listings at the same time have the advantage of expanding financing sources and diversifying risks.
The United States has traditionally advocated investment freedom, and the financial market capacity and the scale of institutional investors are also number one in the world. The ecological advantage of investment and financing is the first choice for companies to list overseas.
In recent years, major overseas markets have stepped up efforts to improve financial infrastructure and systems. The United Kingdom, Singapore, and Hong Kong can all be used as secondary listing options.
Way out 2: Embrace supervision and return to domestic listing.
In March 2018, the State Council forwarded the "Administrative Measures for the Issuance and Trading of Depository Receipts (Trial)" issued by the China Securities Regulatory Commission. Overseas listed companies with a red chip structure can list on A-shares through the issuance of CDRs.
However, with the launch of pilot registration systems on the Sci-tech Innovation Board and ChiNext, the return of Chinese concept stocks can choose to directly issue shares in the domestic A-share market.
In April 2020, the China Securities Regulatory Commission issued an announcement to significantly reduce the market value requirements of overseas listed red-chip companies.
In the future, red-chip companies in traditional industries may choose to return to the main board for listing, while red-chip technology companies may choose to list on the Growth Enterprise Market or the Science and Technology Innovation Board.
(Luo Zhiheng is the vice president of Yuekai Securities Research Institute, and Fang Kun is the macro analyst of Yuekai Securities)
China News Weekly, Issue 29, 2021
Statement: The publication of the "China News Weekly" manuscript is authorized in writing