Chinese shell company assets skyrocket to more than $4 trillion

Bloomberg Market Specialists Wendy Tan and Balkis Ammal contributed to this article. The original version appeared first on the Bloomberg Terminal.

Background

Growing regulatory scrutiny in Washington over Chinese shell companies incorporated offshore is exposing a hidden risk for investors.
Chinese business groups are raising capital globally using companies that don’t own their mainland operating units outright, usually incorporated in locations such as the Cayman Islands, British Virgin Islands or Bermuda. The market value of Chinese companies with primary listings in these three islands is more than $3.7 trillion. Of $894 billion in active bonds sold offshore by Chinese issuers, only about $156 billion is clearly sold by an operating company.

Despite the government pressure, U.S. asset managers have shown a level of comfort with scaling up in China. “They’ll put up with those things if it means getting access to what will be one of the most important economies over the next several years,” Taisu Zhang, a Yale Law School professor who specializes in contemporary Chinese law and politics, told Bloomberg News.

The issue

Offshore structures have been used by Chinese companies to sell stocks and bonds for decades as a means to handle cross-border capital flow regulations. Failures have resulted in restructurings, such as New York-listed Luckin Coffee Inc. in February, Tewoo Group Corp. in 2019 and GITIC Hong Kong way back in 1998.

Billionaire financier George Soros called for the U.S. Congress to pass a bill that would force asset managers to only invest in companies with transparent governance structures. The U.S. securities regulator has given a three-year deadline for Chinese firms to permit inspections of financial audits or risk delisting.

A total of 875 Chinese entities incorporated in Bermuda, Cayman Islands or British Virgin Islands are trading outside of China exchanges. The combined market cap of the companies – including Internet giants Tencent Holdings Ltd., Alibaba Group Holding Ltd. and Meituan – amounts to $3.7 trillion.

Run the Equity Screening function to track offshore Chinese stocks listed by shell companies. The shortcut is EQS.

Bloomberg functionality can analyze investment risks relating to Chinese shell companies.

Tracking

Use the Fixed Income Search function to monitor active bonds Issued by Chinese shell companies.

Type “fixed income search” and select SRCH - Fixed Income Search. The shortcut is SRCH.

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