Delisting of Chinese ADRs Is Part of the New Cold War

There’s battle lines being drawn…Nobody’s right if everybody’s wrong. It’s time for a little Buffalo Springfield, as the tensions between the U.S and China heat up.

According to Markets Insider:

PetroChina and China Petroleum & Chemical Corp, or Sinopec, Aluminum Corp. of China, China Life Insurance, and Sinopec Shanghai Petrochemical each filed regulatory notifications about plans for their shares to cease trading in the US market. The companies said they would submit delisting applications later this month.

We are in the midst of a new Cold War between the U.S and China, and the financial markets are going to feel this. Tensions between the two powers are at heightened levels after Speaker Pelosi’s ill-advised trip to Taiwan, and it threatens a Great Unwind that would hit U.S stocks.

The first casualties will be the ADRs, as delisting form US exchanges is a torturous process that leaves investors with few options.

From the WSJ:

What happens to the value of delisted ADRs? Are they worthless?

The receipts won’t be worthless-effectively they still represent an economic interest in the company. Holders could still collect dividends, for example. But only non-American entities will want to buy the ADRs, which is likely to reduce their value, and they could become difficult to trade and to value.

What can investors do when a stock is going to be delisted?

Investors in the Chinese telecom carriers can sell their ADRs on NYSE before they are delisted or convert them to the Hong Kong-listed ordinary shares. But the U.S. ban also prohibits American investors from buying securities that trade on any exchange anywhere, or even just over-the-counter, so switching into Hong Kong shares might only buy a few months’ respite.

These are not great options. Looking at Alibaba (BABA) , the flagship Chinese ADR, we can see that that has been reflected in the stock’s performance. In the past five years, BABA shares have declined 44%. There’s an entire post-Covid bull market…that just did not occur for Alibaba holders.

But can it get worse? Sure, the process of dealing with a delisted stock is a pain for individual investors and impossible – as the unlisted ADRs are not eligible to be held – for many institutional investors.

The world of OTC Pink Sheet-listed ADRs is the Wild West. I was reminded of that this week when trying to track down some shares of South African food producer Astral Foods (ALFDF) for a client of mine who was drawn by ALFDF’s inclusion in my FOOD model portfolio, which is located behind the paywall at my site,

Not easy to find, and once I did, I discovered that his broker, TD Ameritrade, would pass through some weird JSE exchange fees to us for the privilege of buying the ADR. It was just not worth the hassle, and that’s an obvious conclusion.

As usual, mouth-breathing Nasdaq-fluffers will ignore this as they are today – US inflation was only 8.5%!! – but the “Netflix! BUY!” crowd can drive short-term stock price moves, but not long-term fundamentals.

That has ramifications for Apple (AAPL) , Tesla (TSLA) and other Big Tech names that have exposure to Chinese consumers, although Netflix (NFLX) is banned in China.

According to the CPCA, Tesla local sales in the Chinese market were 8,461 units in July, a 5.9% year-on-year decline. The variants of the Model Y have been on sale for more than a year now in the Chinese market, and the Model 3, which “celebrated” its 5th birthday on July 28th, is just not an in-demand vehicle anywhere in the world anymore. But could the Chinese government make life more difficult for Elon Musk after bending over backwards to help him for three years? Best believe it.

But why focus on fundamentals, when we can focus on stale, unreliable US data that is still showing a generational-high level of inflation, which erodes consumers purchasing power? Because the grifters and con artists that make up the Wall Street hype machine don’t want to tell you that a major end-market for basically everything – with the exception of Netflix – is closing, at the margin, to US companies. This as the same time the world’s largest capital market – the US – is closing to Chinese companies.

Pay attention to Buffalo Springfield. Everybody look what’s going down.

(Apple is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells AAPL? Learn more now.)

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