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Some of China’s largest e-commerce stocks are seeing more of their shares shifted off of U.S. stock exchanges to Hong Kong bourses, even as the Chinese government tries to dispel concerns over some of the companies’ eligibility to remain listed on U.S. exchanges.
As of Tuesday, about 77% of JD.com Inc.’s (JD) shares are circulating in Hong Kong’s clearing and settling system, compared to just 44% at the beginning of the year, according to Bloomberg calculations based on stock exchange data. Also, the portion of Alibaba Group Holdings Ltd.’s (BABA) shares listed in Hong Kong rose to 56% from 53% during the same period. The portion of Hong Kong-listed shares at JD.com and Alibaba had nearly doubled in 2021.
The conversions of Alibaba’s and JD.com’s stocks show investor concerns that the stocks could be delisted from U.S exchanges. By cutting exposure to American depositary shares, investors avoid direct regulatory shocks that may force trading suspensions and liquidation of their stock holdings in the U.S. Holders of depositary receipts can hand their U.S. shares back to the depositary bank to register a conversion, which then swaps them into Hong Kong-listed shares at a set ratio.
The U.S. and China have been at odds for more than 20 years over the mandate that all companies that trade publicly in the U.S. must grant access to audit records. Companies face removal from U.S. stock exchanges if they don’t comply with the requirements for three straight years, meaning they could be kicked off U.S. stock exchanges as soon as 2024. The U.S. Securities and Exchange Commission has named at least 23 Chinese companies on a list of those who have not complied with the auditing requirements.
A conversion from U.S. shares to Hong Kong shares doesn’t offset all of the risks from a U.S. delisting. Investors will have to deal with a less liquid market and potentially lower valuation when shares are shifted to Hong Kong. The Hang Seng Tech Index has plunged -by 27% this year, and the risk of abandoned U.S. listings is a key negative factor. Didi Global (DIDI) sank -18% Monday after it said it plans to delist its U.S.-traded shares before it finds a new venue for its stock.