The past two years have been challenging for Chinese concept stocks, as the macroeconomic landscape has been overshadowed by various uncertaintiesThis has led to an alarming trend: nearly every Chinese company listed in the U.S. that has released its annual reports is at risk of being placed on a “temporary delisting” listThis concern has intensified recently, particularly following the inclusion of tech giant Alibaba in this list by the U.SSecurities and Exchange Commission (SEC), reigniting fears around delisting risks for Chinese firms operating in the U.S. markets.

In response to these mounting pressures, Alibaba has taken significant steps to pivot its strategies by applying to shift its status on the Hong Kong Stock Exchange from secondary listing to a primary listing, with expectations of completion by the end of 2022. Such a move sends a clear message to the markets illustrating that the Hong Kong stock market is emerging as a “safe haven” amidst the ongoing delisting crisisThe trend of Chinese firms seeking refuge in Hong Kong seems to be one of the most effective means of alleviating risk during this turbulent period.

Simultaneously, clarity has begun to surface regarding the regulatory direction of the domestic platform economy, which leaves investors pondering how to best balance risks and opportunitiesThe resolutions and responses exhibited by regulatory bodies, listed companies, and institutional investors may yield insights into new strategies for navigating the evolving landscape.

Currently, negotiations are ongoing between regulatory authorities in China and the U.S. surrounding audit cooperationAccording to the Holding Foreign Companies Accountable Act (HFCAA), which was passed by the U.SCongress in 2020, foreign companies listed in the U.S. that cannot provide access to their audit papers for three consecutive years will be mandatorily delisted by 2024. This regulation also applies to over-the-counter stocks

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As of June 2022, the SEC had already added 155 Chinese companies to its list of entities suspected of non-compliance in disclosing audit resultsThe stakes are high: the future trajectory of these companies rests immensely on the progress made by regulators in China and the U.S. in reaching an agreement on audit cooperation.

Nonetheless, the longer the temporary delisting list grows, the more it indicates stagnation in cooperation efforts between the two nations, as ongoing discussions show no significant progressCompounding this issue, the SEC continues to exert pressure, insisting on full access to audit papers, with potential timelines for delisting being moved up to early 2023, rather than the previously indicated 2024.

In an effort to mitigate these mounting pressures, Chinese concept stocks are proactively exploring routes to return to Hong KongWhile reaching a regulatory consensus remains uncertain, several listed companies are not simply waiting idly; instead, they have embarked on efforts to establish alternative pathsThe movement towards shifting from secondary listings to primary listings in Hong Kong is rapidly gaining traction among Chinese firms.

Shortly after Alibaba was placed on the SEC's temporary delisting list, the company announced its intention to convert its secondary listing on the Hong Kong Stock Exchange into a primary listing by the end of 2022. Similarly, other companies, like Zai Lab and Bilibili, are also making the transition from secondary to primary listingsAccording to statistics from Hong Kong's Financial Services and the Treasury Bureau, 70% of Chinese concept stocks currently listed in the U.S. have either begun or completed their primary or secondary listings in Hong Kong, with many firms now gravitating towards primary listings.

The overarching trend indicates that many of these companies are opting for dual primary listingsProminent firms that have undertaken this route include Li Auto and Xpeng Motors, along with recent listings like Beike, Zhihu, and OneConnect Financial Technology

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Amid the undetermined risks surrounding Chinese concept stocks, the move to primary listings in Hong Kong helps alleviate concerns regarding forced delisting while retaining access to USD-based fundingThis also offers the opportunity to qualify as stocks under the Hong Kong Stock Connect scheme, thus broadening the investor base and attracting new sources of liquidity.

Looking ahead, as quality Chinese firms seek to expand globally while minimizing uncertainties associated with their foreign listings, it appears that Hong Kong is poised to emerge as the largest dollar financing market for Chinese enterprisesIndeed, not just companies, but also a variety of institutional investors are participating in this movement towards Hong Kong.

Recent data from the Central Clearing and Settlement System (CCASS) indicates that, in the past year, institutional investors have been actively shifting their holdings in Chinese technology stocks from U.SADRs to Hong Kong sharesMost of the circulating shares for sought-after Chinese stocks, such as Alibaba, JD.com, Baidu, and Trip.com, are now registered in Hong Kong.

Additionally, Morgan Stanley's analysis affirms that foreign investors are increasing their investments in Chinese technology stocks, although the majority of capital is flowing into the Hong Kong market instead of the ADR shares listed in the U.SAmidst the ongoing uncertainty surrounding Chinese concept stocks, investors face a precarious balancing act between potential risks and opportunities.

While precise predictions for the future remain elusive, the trend of companies and institutional investors gravitating towards Hong Kong highlights that technology stocks listed there have become a dual-benefit selection—effectively mitigating uncertainties while capitalizing on opportunities for technological growth.

Indeed, since April of this year, when the country’s platform economy began to witness regulatory bottoming, the Hang Seng Technology Index has rebounded nearly 10%. As evidence of growing investor confidence, the Southern Eastern Hang Seng Technology Index ETF (3033.HK) achieved impressive daily trading volumes, nearing 1.7 billion HKD in July, consistently ranking among the top traded instruments on the Hong Kong stock exchange

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