Recently, BABA announced that he would change his application for secondary listing in Hong Kong to a dual major listing, and five state-owned enterprises announced the delisting of US stocks ADR, which once again aroused investors' attention to the cross-border audit process. At present, China and the United States are committed to reaching cooperation in this regard, but still do not rule out the risk of the passage of the accelerated Foreign Company Accountability Act.

In this context, the HKEx optimizes the listing system, lowering the qualification requirements and providing time "exemption" for involuntary delisting issuers, so as to facilitate the return of US stocks to Hong Kong. At the trading level, the gradual return of US stocks has led to a gradual transfer of trading volume to the Hong Kong Stock Exchange, and the opening of southward investment channels for Hong Kong stocks is also expected to provide incremental liquidity support to the Hong Kong stock market. At present, the market is overly worried about the liquidity problem.

Considering the time of returning to Hong Kong, fundamentals, transaction area and other factors, the impact of HFCAA Act on Chinese enterprises is relatively limited.

China and the United States are committed to reaching cooperation on cross-border audit of Chinese stocks, but do not rule out the risk of speeding up the passage of the bill.

Recently, BABA announced that he would turn his application for secondary listing in Hong Kong into a dual major listing; Petrochina, China Petroleum & Chemical and other five companies announced the delisting of US stocks ADR, and other events once again aroused investors' attention to the cross-border audit process.

Since the end of last year, China's Securities Regulatory Commission has drafted and amended bills one after another to bring red chip, VIE and other structured enterprises into the scope of management. It also makes it clear that Chinese regulatory authorities and overseas regulatory agencies can cooperate to carry out cross-border regulatory activities, leaving room for general audit cooperation.

However, in the United States, recently, relevant personnel of the SEC have repeatedly stated that there are still major problems in the discussion of cross-border audit between China and the United States, and have repeatedly stressed that the "accelerated Foreign Company Accountability Act" may be passed, and there is not enough time for negotiation. Taken together, China and the United States are committed to reaching cooperation on cross-border regulatory issues, but it is unclear whether a consensus can be reached within the time limit. It does not rule out the risk of speeding up the passage of the bill and shortening the deliberation time to two years (that is, 2023).

Under the optimized listing system of the HKEx, there is expected to be plenty of time for US-listed stocks to return to Hong Kong.

Under the background that China and the United States have not yet reached a consensus on the issue of general audit, it may become a mainstream trend for US stocks to return to Hong Kong for listing. After the HKEx improved its listing system in November, the minimum market capitalization requirement for a secondary listing was only HK $3 billion. And the Hong Kong Stock Exchange has also proposed the rule that secondary listed companies turn into dual major listings.

Among them, issuers who are involuntarily delisted on major listed exchanges have a 12-month grace period for preparing financial statements in accordance with the standards, and enjoy exemption from the three-year rule. The HKEx has left more "grace" space for US stocks that are involuntarily delisted, which greatly facilitates the return of US stocks to Hong Kong for listing.

The market may be overly worried about the "liquidity problem" in China.

From the perspective of the primary market, we estimate that the average annual IPO of returning enterprises is about HK $80 billion, corresponding to about 23% of the average annual IPO of Hong Kong stocks in the past three years. And considering that there is no new financing demand for enterprises to return to Hong Kong to list, they can also choose the "introduction listing" mode, so the fund-raising pressure on the Hong Kong stock market is expected to be less.

From the perspective of the secondary market, we believe that it may not be objective to infer the liquidity carrying capacity of the secondary market after the return of Hong Kong stocks according to the history of Hong Kong stocks. Despite the continued tightening of interbank liquidity in Hong Kong since the beginning of the year, the turnover of Chinese companies listed in Hong Kong and the United States is still clearly "shifting" to the Hong Kong stock market.

Of the 19 companies (excluding those returning to Hong Kong after 2022), as many as eight companies accounted for more than 10 percentage points in Hong Kong stock turnover since the beginning of the year. As US ADR and Hong Kong stocks can be freely converted, high-quality companies that have or have the conditions to return to Hong Kong for listing will still be favored by global investors for a long time.

In addition, dual major listed companies will be eligible to be included in the Hong Kong Stock Connect. If US stocks are involuntarily delisted, companies with larger market capitalization may also enter the stock market, thus bringing about incremental southward capital inflows.

Short-term market sentiment may still be under pressure, and the value of medium-and long-term allocation of overseas Chinese stocks is prominent.

Considering the time of returning to Hong Kong, fundamentals, transaction area and other factors, the impact of HFCAA Act on Chinese enterprises is relatively limited. However, it is still necessary to pay attention to the negative impact of the unwillingness or inability of some US investors to convert shares (especially retail investors) on ADR.

At present, dual-listed companies account for 10.3% of the Hang Seng Index and 33.4% of the Hang Seng Science and Technology Index, and the short-term overseas Chinese stock market, especially the New economy sector, may also be dragged down by tighter regulation.

However, from a medium-and long-term point of view, combined with the current low valuation level of overseas Chinese stocks and the trend that EPS expectations have basically stopped downward revision, we are still firmly optimistic about the long-term allocation value of high-quality medium-sized enterprises in the future.

Risk factors:

1) the PCAOB and SEC of the United States have stepped up supervision over Chinese stocks, resulting in the outflow of foreign capital and the delisting of Chinese enterprises.

2) further escalation of geo-conflict

3) the Fed tightened monetary policy more than expected.

4) the supervision of domestic industry or the supervision measures for overseas listed enterprises have been greatly tightened.