Behind the NYSE’s Swerves on Delisting China Stocks

(Bloomberg) -- In the course of a week, the New York Stock Exchange said it would delist a trio of Chinese companies, then that it wouldn’t and then that it would, stoking confusion among investors globally. The moves were the result of an initiative by President Donald Trump to punish companies with close ties to the Chinese military as part of a crescendo in U.S.-China tensions. The dizzying sequence also reflects ambiguity over both how Trump’s push would work and what its impact would be. Investors are bracing for the possibility of more.

1. What does delisting mean?

It’s the process of removing a stock from a public exchange where it’s been traded. The most common reason for a delisting is when a company runs into financial trouble and its value falls below a minimum set by an exchange for inclusion or it is purchased by a different entity. Companies can also be delisted in order to comply with U.S. laws like Trump’s executive order.

2. What’s led to the move to delist these stocks?

In November, Trump issued an executive order requiring investors to pull out of Chinese companies that were deemed a threat to U.S. national security. The companies must have been categorized by the Departments of the Treasury or Defense as being tied to the Communist Chinese military. The order said that designated stocks cannot be purchased by Americans starting on Jan. 11, and that holdings by Americans must be fully divested by November when transactions will be frozen.

3. What happened with the NYSE?

On New Year’s Eve, it announced it would delist shares of China Mobile Ltd., China Telecom Corp., and China Unicom Hong Kong Ltd. in order to comply with Trump’s executive order after the Treasury designated them as Communist Chinese “military companies.” Four days later, the exchange went back on the decision, saying it would no longer delist the companies after consultation with regulatory authorities. That change of tone didn’t last long, as flack from the White House pressured the exchange to make a second U-turn roughly 24 hours later.

4. What did those turnarounds do?

The confusion that gripped Wall Street caused the trio of companies to lose roughly $8.7 billion in market value on Jan. 4 -- on top of the more than $30 billion shed in the final weeks of 2020 -- only to snap back higher then tumble on Thursday as the roller coaster week marched on. Lawyers said the drama exposed the ambiguities of the government’s instructions and added to a whirlwind of trading.

5. What happens to the NYSE-listed shares once they’re delisted?

The impact is a little indirect, because shares of non-American companies aren’t traded directly on American exchanges, but through holdings known as American depository receipts, or ADRs. The ADRs can equal underlying shares on a one-for-one basis, a fraction, or multiple shares of the company. For the three telecom companies, their ADRs were Level III -- the most prestigious category -- used by large companies to establish or expand their presence in U.S. markets.

6. What will happen to the ADRs?

Starting Jan. 11, they’ll either be sold, converted to equity traded in Asia or moved to so-called pink sheets. That means that investors don’t have to sell their shares yet, but a transfer to pink sheets -- a listing service for stocks that trade over-the-counter and not on NYSE or exchanges like the Nasdaq -- means there will be fewer investors to buy the stock before the November deadline.

7. What are pink sheet stocks?

Pink sheet stocks lack liquidity and can be volatile with large spreads between what a bidder is willing to pay and the price a seller is asking for. The securities have historically been seen as highly speculative and recently entered the mainstream through the movie, “The Wolf of Wall Street.” In addition, under the executive order, buying pink sheets of China Mobile or the other two telecoms would be illegal for Americans, so many investors could elect to bail on their positions before the order takes effect.

8. How big a deal is this?

That’s hotly debated. The removal of the ADRs and restrictions on American investing will limit the capital the three stocks can attract but some on Wall Street have argued that the removal was mainly a blow to investor sentiment. They point to the fact that U.S. trading for the trio makes up a tiny fraction of the volume seen in Asia for some companies.

9. Will more Chinese companies get delisted?

Senior U.S. officials are discussing whether to add Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to the blacklist. The addition of China’s two most-valuable publicly listed companies would be a leap for the sanctions given how widely held they are in the U.S. If the U.S. decides other companies have military ties in the future, investors will be given 60 days from the determination to divest their positions. Trump also signed an order which bans U.S. transactions on eight Chinese apps including Tencent’s digital wallets.

10. Who could be next on the U.S.’s blacklist?

Investors have been scrambling to gauge who could be at risk to be the next firms delisted in the U.S. with the nation’s oil majors including CNOOC Ltd. falling on worries that they could be hit. But as with the three telecoms stocks, most of the oil majors are thinly traded in the U.S. because they haven’t raised a lot of money here.

11. Could China retaliate?

Yes, governments have historically retaliated to sanctions and China is no different. Bloomberg Intelligence’s Andrew Chan called out MGM China, Sands China and Wynn Macau as potential targets for the Chinese government as all three Macau casino companies have U.S. parent firms. A move to target Alibaba or Tencent could increase the odds of a response from China.

12. What could a change in U.S. administrations do?

That’s not clear. After President-elect Joe Biden is inaugurated Jan. 20, he will have the power to reverse the bans. Biden’s selection of Lloyd Austin as Defense Secretary may give investors comfort, according to Jefferies analysts, as it indicated “an approach based on diplomacy and pragmatism.” The bank also argued that Biden would likely undo any last-minute ban by Trump of Alibaba and Tencent.

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