Tighter ADR regulations: A boost for Hong Kong

Tighter regulatory scrutiny on Chinese ADRs, amid re-escalating US-China tensions, will accelerate the dual-listing trend into the Hong Kong market. The price impact on existing Chinese ADRs may however be surprisingly muted.

Ken Wong
Client Portfolio Manager

May 2020 | 3 min read

The US Senate passed the Holding Foreign Companies’ Accountable Act on 20 May 2020, tightening regulations on American Depositary Receipts (ADRs). The Act requires companies listed on any of the US securities exchanges to certify that they are not under the control of a foreign government. Companies can also be suspended or delisted if they are unable to comply with the audits by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years.

Thanks for subscribing!

Follow us :

US listings have been a popular way for China’s technology companies to raise capital given the strict restrictions at home. The Act, if it gets passed through Congress and signed by President Trump, could result in Chinese ADRs being delisted from the US stock exchanges as Beijing currently prohibits the PCAOB from inspecting the audit records of China and Hong Kong headquartered companies.

No surprise

The Act should not come as a surprise since discussions on increased disclosure requirements were already underway since last year. The rising US-China geopolitical tensions ahead of the US elections (and post the coronavirus outbreak) as well as the recent accounting scandal at US-listed Lukin Coffee are further catalysts.

A number of US-listed Chinese companies, such as Alibaba, had already turned to secondary listings in Hong Kong last year to broaden their investor bases and reduce risks. The recent passing of the Act in the Senate is likely to compel other companies to do likewise.

Muted impact

There are currently 233 Chinese ADRs listed in the US (primary listings only), with an aggregate listed market capitalisation of USD 1.03 tn. This represents 3.3% of US equity market capitalisation and 8% of all-China market capitalisation.

Among the ADRs, there are about 11 state-owned companies1 which would be impacted if the proposed legislature passes. However, even if some of China’s large state-owned companies such as Petrochina, Sinopec and China Life Insurance are forced to withdraw their ADR listings, the impact is likely to be muted for these companies.

Petrochina’s ADRs, for example, only account for about 1.9% of its outstanding shares with its Hong Kong listing making up for 52.1%. Likewise, for China Life, its ADRs account for only 1.1% of its outstanding shares while its Hong Kong listing makes up 41.3%.

The price impact on the ADRs could also be relatively moderate. It is estimated that US investors hold about USD 350 bn worth of Chinese ADRs, which translates to about one-third of the ADR universe.

Hypothetically, it would take more than 200 days for US investors to fully liquidate their ADR exposures2. If the bill becomes law, there could be a 3-year transition period starting from the date of enactment for affected companies to come into compliance. This transition period could further mitigate the liquidity impact on the market and share prices.

The price impact for some of the state-owned ADRs, could be even more limited given their light trading volumes. Over the past 30 days, for example, the trading value for China Life’s and PetroChina’s ADRs averaged USD 5.6 mn and USD 5.5 mn per day respectively. In contrast, over in Hong Kong for the same duration, the daily trading value for China Life and PetroChina averaged USD 75 mn and USD 36 mn respectively3.

That said, the delisting could pose greater problems for selected technology companies whose US listing accounts for a large percentage of their market capitalisation. Given the potential 3-year transition period, these companies which were listed in 2018 may still have time for potential negotiation/adjustments among related parties.

A boost for Hong Kong

Tighter regulatory scrutiny on Chinese ADRs, against a backdrop of re-escalating US-China tensions is likely to accelerate the dual-listing trend into the Hong Kong market. High profile listings of new economy companies could also lift trading activity. For example, while Alibaba’s Hong Kong listing only account for 0.3% of Hong Kong’s total market capitalisation, it has contributed to 3-4% of the market’s total turnover in the past 90 days4.

It was also announced earlier this week in Hong Kong, that the benchmark Hang Seng Index will for the first time admit companies with secondary listings and multiple classes of voting rights. These reforms, the largest in 14 years, will allow companies such as Alibaba to be included in the index, helping to make Hong Kong a more attractive listing destination for US-listed China technology companies going forward.

The dual-listing trend would be a boost for Hong Kong as the number of Initial Public Offerings (IPOs) has fallen significantly this year. 2020 marks the first time in six years where Hong Kong did not rank among the top three centres globally for IPOs. This may be about to change.

For Use with Professional Clients / Qualified Investors Only. Not Approved for Further Distribution or Use with the General Public.

The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.


Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.


Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.


The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.


Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.


Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.


Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.