Even though China and the US have reached a tentative agreement to end a decades-long dispute over audits, Goldman Sachs Group Inc. said that the markets continue to price in a 50% chance that Chinese businesses will be delisted from US exchanges.
According to Kinger Lau, according to the firm’s “delisting barometer” based on quantitative models, market estimations of the danger have decreased from a top of 95% in March, but execution risk remains, as strategists including Kinger Lau stated in a note published Monday.
Last week, Chinese equities traded in the United States and Hong Kong rose as optimism grew that a deal would soon be reached, removing a big regulatory cloud from share prices. The statement made by the two parties on Friday night showed that American regulators will be able to see audit work papers from Chinese companies. This is an important step toward keeping Chinese stocks trading on US bourses.
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In the best-case “no-delisting” scenario, in which Beijing and Washington achieve a definitive agreement, US-listed Chinese companies and the MSCI China Index may experience valuation increases of 11% and 5%, respectively, according to Goldman Sachs (NYSE:GS). In the case of a forced delisting, the bank expects American Depositary Receipts and the MSCI China index to drop by 13% and 6%, respectively.
According to the paper, Goldman Sachs is overweight in the technology, media, and telecommunications sectors despite ongoing delisting uncertainties due to improved regulatory barriers and affordable valuations.
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The Hang Seng Tech Index is still down around 25% this year due to broader concerns about China’s slowing development and uneven corporate earnings. Most investors think that Beijing’s crackdown on IT has passed its worst, but the mood is still fragile, and stock prices change with every small regulatory announcement.
Goldman Sachs anticipates that the longer-term trend of corporations pursuing Hong Kong listings will continue regardless of the outcome of the audit negotiations.
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Although the audit inspection agreement may reduce the risks of widespread delisting, it does not change our view that the uncertainty surrounding US-China tensions in key strategic domains — trade, technology, capital markets, and geopolitics — will continue to motivate Chinese ADRs to diversify their listing risk away from the United States, the strategists said.
