COMMENTARY: Lure of Wall Street Keeps Attracting China's Tech Companies

Though economic relations are on a downward spiral amid a worsening trade war and plummeting direct investment, Chinese IPOs on U.S. markets may hit record this year.

Mark Melnicoe
    May 11, 2019 5:20 AM  PT
COMMENTARY: Lure of Wall Street Keeps Attracting China's Tech Companies
author: Mark Melnicoe   

Despite the imminent opening of a high-tech stock board in Shanghai to compete with Nasdaq, Chinese technology firms are lining up for a possible record-setting surge of IPO listings in New York.

The activity stands in stark contrast to the rest of the Sino-American economic relationship, which seemingly is falling to pieces. Not only are trade negotiations breaking down – perhaps irreparably – but Chinese foreign direct investment in the United States has slowed to a trickle amid all the tensions. FDI dropped 84 percent in 2018 from year-earlier levels, according to figures from the Rhodium Group, as the Trump administration pulled in the welcome mat.

But when it comes to company listings in the stock market, it's an altogether different story. Why? The catalyst may well be the continuing bull market in the U.S., now more than 10 years old. America's strong economy and plentiful jobs contrast with the situation in China, where stocks have taken a roller-coaster ride the past few years, including a major selloff at the end of last year.

While they had recovered strongly since then, the trade war has suddenly sent the Shanghai and Shenzhen stock exchanges back into high levels of volatility. The Shanghai Composite Index plunged almost 5.5 percent Wednesday, then largely recovered to end the week.

The U.S. markets look tranquil in comparison. While the major indices fell this week, they did drop nearly as much and they remain close to their all-time highs. Chinese stocks sit more than 40 percent below their peak of three years ago.

Chinese Companies Flock to Wall Street

Chinese companies are coming to the U.S. in large part because they gain access to more institutional investors and more money. It's a trend with legs. Last year, 33 Chinese companies went public on American bourses, mainly the Nasdaq. Most were in the tech sector, and they accounted for more than one in every six IPOs launched on U.S. exchanges in 2018. More IPO listings came from China, in fact, than Silicon Valley for the third year running.

While none came close to Alibaba's splash in 2014, when its $21.8 billion IPO was the largest in history, the companies kept coming. Last year's biggest China IPO came from iQiyi Inc. (Nasdaq: IQ), the video streaming company that raised $2.3 billion.

"A lot of the Chinese tech companies are already backed by U.S.-based VCs, which made it natural for them to think about going public in the U.S.," Kevin Carter, founder of the Emerging Markets Internet and Ecommerce ETF, told Yahoo Finance.

E-commerce company Pinduoduo Inc. (Nasdaq: PDD) and electric vehicle maker NIO Inc. (NYSE: NIO), both backed by Sequoia Capital China, a subsidiary of the California-based venture capital firm, also listed last year. Pinduoduo raised $1.6 billion, while NIO raised $1.15 billion. Another $1 billion IPO was Tencent Music Entertainment Group (NYSE: TME).

The trend looks set to continue at even higher levels this year, but again without the huge splash of an Alibaba Group Holding Ltd. (NYSE: BABA).

Last week saw two Chinese companies launch IPOs on Nasdaq, including social e-commerce firm Yunji Inc.(Nasdaq: YJ), which raised $121 million, and So-Young International Inc. (Nasdaq: SY), an online marketplace for plastic surgery, which raised nearly $180 million. Both surged in price from their IPO prices – something that doesn't always happen with Chinese stocks.

More Chinese listings are on the way, including Luckin Coffee, which is making a serious run at Starbucks (Nasdaq: SBUX) in China as the Chinese people, especially young adults, drink more and more coffee. Analysts expect it to raise $500 million to $800 million in its IPO, putting its total value at as much as $5 billion.

"It seems like we will have over 40 IPOs from China coming to the U.S. this year," Bob McCooey, chairman of Nasdaq Asia-Pacific, told CNBC this week. "So, 2019 could be the strongest year ever."

As of February 25, some 156 Chinese companies were listed on U.S. stock exchanges, with a total market cap of $1.2 trillion, according to the U.S.-China Economic and Security Review Commission.

Seeking Credibility Amid Turmoil

The trend may seem odd from the vantage point of deteriorating relations between the world's two biggest economies, but there are reasons beyond purely raising the most possible money.

For one, the exchanges in Shanghai and Shenzhen, China's two main bourses, maintain arcane rules that require profitability and other factors before companies can list. And Chinese market authorities can seem arbitrary and downright fickle at times, taking many months to approve companies during times of market turmoil.

While China is modernizing, its financial markets lack the credibility of those in industrialized countries. Regulators were heavily criticized during the market crash during the summer of 2015, when they intervened heavily and clumsily.

Investors were jolted as the Securities Finance Corporation allowed half of the companies on the Shanghai and Shenzhen exchanges to halt trading for days or weeks at a time. Controlling shareholders and board members were prohibited from selling their stocks in the open market for six months, and 21 brokerage firms were pushed to buy blue-chip stocks directly with $42 billion in government loans.

Now Chinese stocks again are being battered by a suddenly red-hot trade war that figures to hurt China's economic growth more than that of the U.S. – at least in the short term.

All these factors add up to a continuing strong demand among China's tech companies to list not in Shanghai or Shenzhen, or even in Hong Kong but instead in New York, where the outlook shines a little brighter.