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By Samuel Shen and Xie Yu
SHANGHAI/HONG KONG (Reuters) - Global fund managers holding U.S.-listed Chinese stocks are steadily shifting towards their Hong Kong-traded peers, even as they remain hopeful Beijing and Washington will eventually resolve an audit dispute to keep Chinese firms on American exchanges.
The pace of migration will likely accelerate, as more Chinese firms listed in New York are expected to follow technology giant Alibaba's intent to launch so-called primary listings in Hong Kong, potentially boosting liquidity there to smooth the transition.
KraneShares CSI China Internet ETF (KWEB), a New York-listed fund focused on Chinese tech plays, started swapping American Deposit Receipts (ADRs) into Hong Kong shares in December, when U.S. securities regulators finalised rules to prohibit trading of Chinese companies not compliant with U.S. audit rules.
Under the U.S. rules, Chinese ADRs will be ejected from exchanges in early 2024 if U.S. regulators cannot have complete and timely access to the Chinese companies' audit working papers - a request so far denied by Beijing on national security grounds.
Hong Kong-traded stocks account for more than 70% of KWEB's portfolio, latest data shows, compared with just 25% in March 2021. By the end of this year, the fund aims to be fully invested in Hong Kong shares.
"It behooves both sides to resolve this issue as there's no winner in a delisting scenario," said Brendan Ahern, CIO of Krane Funds Advisors, which manages the fund.
But under fiduciary duty to protect investors' money, "you're going to take the more conservative path."
Ahern hailed Alibaba's plan to upgrade its secondary listing in Hong Kong to a primary listing, saying such a move "allows companies to have their cake and eat it too."
LIQUIDITY PRESSURE
Still, Hong Kong is a relatively small and retail-driven market compared to the U.S., and it might face pressure to offer liquidity support if delisting kicks in, said Jon Withaar, head of Asia Special Situations Equities at Pictet Asset Management.
"You have so many companies that are Chinese ADRs that will need to come back home. This is almost a trillion dollars, on top of a lot of companies in the private space looking to become public," he said.
A primary listing would allow the stock to be included in the China-Hong Kong Stock Connect, thus making stocks eligible for mainland investments and potentially increasing trading volumes, but nothing close to the depth of U.S. markets.
Equity trading turnover on the New York Stock Exchange and the Nasdaq each was roughly seven times that of the Hong Kong bourse in 2021, according to the World Federation of Exchanges.