Macro

US-Traded Chinese Firms Delisting Risk Spikes, Index Falls 6.3%

TD Cowen warns of increased delisting risk for US-traded Chinese firms amid escalating US-China financial tensions.

By Jack Wilson

4/16, 20:45 EDT
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Key Takeaway

  • TD Cowen warns of a "real and rising risk" of US Congress forcing delistings of Chinese firms from US exchanges.
  • Nasdaq Golden Dragon China Index fell 6.3% amid concerns, with Hesai Group down 21% since April 11 due to military ties.
  • Risk may escalate in late summer or fall with the National Defense Authorization Act, further heightened by potential Trump presidency in 2025.

US-China Tensions Escalate in Financial Markets

The potential delisting of Chinese companies from US stock exchanges has become a focal point of escalating tensions between the United States and China, with significant implications for global financial markets. TD Cowen has highlighted a "real and rising risk" of such actions, particularly in light of a letter from 10 Republican lawmakers to Nasdaq Inc. CEO Adena Friedman. This letter, dated April 11, demands explanations for the continued listing of firms identified on the Defense Department’s 1260H list of Chinese Military Companies. The Nasdaq Golden Dragon China Index, which tracks Chinese companies listed in the US, experienced a 6.3% decline in the three trading days following the letter, underscoring the market's sensitivity to these geopolitical developments.

Bipartisan Pressure and Market Impacts

The pressure on Nasdaq and potentially other exchanges to delist Chinese companies deemed to have military ties is not solely a Republican stance but is seen as a bipartisan issue, despite the letter's signatories. The focus extends beyond individual companies, such as Hesai Group, which saw a 21% drop since April 11, to a broader concern over Chinese military access to US capital markets. The bipartisan nature of this issue suggests that any legislative action could gain traction, potentially leading to significant market movements and investor uncertainty.

China's Regulatory Response and Market Reassurance

In response to the turmoil and fears of mass delistings in its domestic markets, China's top securities regulator, the China Securities Regulatory Commission (CSRC), has sought to reassure investors. New stock exchange rules targeting "zombie" companies and "bad actors" rather than small caps aim to improve market health without triggering widespread delistings. Despite a sharp decline in the CSI 2000 Index of small-cap companies, the CSRC's clarifications and the historical context of minimal impact from past rule changes suggest that the immediate fears may be overblown. However, the regulatory environment remains a critical factor for investors to monitor.

Street Views

  • Jaret Seiberg, TD Cowen (Neutral on US-traded Chinese companies):

    "There’s a real and rising risk that the US Congress may force the country’s stock exchanges to delist some Chinese companies... This is an easy provision to include in any bill that looks like it will be enacted."