Chinese companies have capitalized on the U.S.’s open capital markets for decades. As the U.S.-China relationship frays, examining Chinese integration in the healthcare and biotech sectors must involve U.S. national security.
This table includes Chinese companies listed on the NASDAQ, New York Stock Exchange, and NYSE American, the three largest U.S. exchanges. As of October 2, 2020, there were 217 Chinese companies listed on these U.S. exchanges with a total market capitalization of $2.2 trillion. 15 of these are in the healthcare/biotech sector. Companies are arranged by the size of their market cap.
This list of Chinese companies was compiled using information from the New York Stock Exchange, NASDAQ, commercial investment databases, and the Public Company Accounting Oversight Board (PCAOB). NASDAQ information is current as of February 25, 2019 as NASDAQ no longer publicly provides a centralized listing identifying foreign-headquartered companies.
For the purposes of this table, a company is considered “Chinese” if: (1) it has been identified as being from the People’s Republic of China (PRC) by the relevant stock exchange; or, (2) it lists a PRC address as its principal executive office in filings with U.S. Securities and Exchange Commission.
Of the Chinese companies that list on the U.S. stock exchanges using offshore corporate entities, some are not transparent regarding the primary nationality or location of their headquarters, parent company or executive offices. In other words, some companies which rely on offshore registration may hide or not identify their primary Chinese corporate domicile in their listing information. This complicates tracing, making it difficult to guarantee that this list captures all Chinese companies registered offshore. Companies domiciled exclusively in Hong Kong also are not included on this list. Empty fields for company’s IPO year, IPO value, or underwriters means the information was not available.
Investment in Chinese companies may entail several risks associated with the legal, regulatory and financial environment in mainland China, including:
Lack of transparency: The PCAOB, a nonprofit corporation established by Congress to oversee the audits of publicly traded companies listed on U.S. exchanges, is currently unable to inspect working papers of auditors based in the PRC and Hong Kong. In 2013, the PCAOB signed a Memorandum of Understanding (MOU) on audit oversight with the China Securities Regulatory Commission and the Ministry of Finance. Over the next seven years, the Chinese government has prevented Chinese-based auditing firms from complying with U.S. law on audit inspections. The PCAOB and the U.S. Securities and Exchange Commission have repeatedly expressed their concern regarding obstacles to PCAOB inspection of auditors based in the PRC and Hong Kong. The PCAOB maintains a list of 260 companies around the world where it is unable to conduct inspections: 238 of these companies are based in China and Hong Kong. This lack of compliance with international audit inspections calls into question the reliability of the corporate financial statements guiding valuation and investment. The case of Luckin Coffee illustrates the risks. In presenting information to support its initial public offering, Luckin manipulated critical revenue, operations and customer traffic data. During its IPO, shares traded at $17 raising $561 million in capital. Luckin’s peak market capitalization was $12 billion, with shares trading at just over $50. Within weeks of the disclosure of falsified information, the stock collapsed ultimately leading to losses for investors and its delisting from NASDAQ.
VIEs have no legal standing in China: The PRC legally prohibits foreign direct investment in certain industries, including many high-tech sectors, and maintains strict controls on foreign exchange and capital flows. To circumvent these restrictions, mainland Chinese companies interested in raising funds on U.S. exchanges create offshore corporate entities for foreign investment using a complex structure called a variable interest entity (VIE). In a March 2019 survey of 182 Chinese companies listed on NYSE and NASDAQ, Paul Gillis, professor of practice at Peking University Guanghua School of Management, found that 125 of these companies used the VIE structure. VIE arrangements between mainland companies and their associated offshore entities have questionable status under Chinese laws. This means U.S. investors could have no recourse to enforcement in the Chinese legal system if VIE-listed companies take the company private at lower valuation or if the businesses fail. According to Steve Dickinson and Dan Harris, co-authors of the China Law Blog and attorneys focusing on Chinese law, there is an additional risk related to VIEs. Since they have questionable legal status in China, the government could take action to close or control operations. To date, the Chinese government has not acted against VIEs.
National security risk: Investors in Chinese companies may support activities that are contrary to U.S. national interests, including the development of technology used for censorship and surveillance and in support of the military. For example, Weibo Corporation, currently valued at $8.7 billion, works under government direction to censor posts on its blogging platform and is used by the central and local governments to surveil and censor public protests. Ostensibly private companies in China are subject to pressure and control by the state. China’s 2017 National Intelligence Law states, “any organization or citizen shall support, assist, and cooperate with state intelligence work” and the 2017 Cybersecurity Law requires companies to “provide technical support and assistance to public security organs.” The CCP’s “Opinion on Strengthening the United Front Work of the Private Economy in the New Era” released on September 15, 2020 stresses the importance of CCP control over the private economy, including private entrepreneurs. According to Beijing-based political analyst Wu Qiang, the opinion “serves as a reminder for the firms that they are always affiliates of the Party, which has firm control over them.”
China’s Biotech Industry
China’s biotech industry has been growing rapidly in the past decade but still remains less than a tenth the size of the U.S. biotech industry in terms of market size, according to a reported prepared by the U.S. government, “China’s Biotechnology Development: The Role of U.S. and Other Foreign Engagement.” China’s biologics market is estimated at 30 to 40 billion yuan ($4.7 to $6.2 billion) and their agricultural biotech market is around $8.1 billion, while estimates places those U.S. markets at $118 billion and $110 billion, respectively. Overall, the U.S. maintains its lead through world-class research training and strong governmental support of R&D, but China is seeking to close the gap through its top-down government strategy and coordination, talent recruitment programs, high R&D spending across the industry, and capacity for high-tech R&D. Another method many Chinese companies use is partnerships with U.S. research organizations and private companies that share data and information in ways that are likely to come under scrutiny.
China’s biotech sector is dominated by biologics and other medical technologies. The segment is growing quickly due to increasing demand and the high value of the products relative to traditional pharmaceuticals. While Chinese biotech companies develop few innovations (instead producing biosimilars or performing contract research and manufacturing), they still provide a high-tech and high-skill foundation for future innovation, with potential demonstrated in some cutting-edge technologies like CAR-T and CRISPR.
China’s drug approval policies create advantages for Chinese developers of biopharmaceuticals and other drugs. Drugs manufactured in China and drugs not previously approved outside of China receive fast-track review. The duration of market protection via data exclusivity for newly approved biologics is maximized when clinical trials are performed in China and the drug is not approved elsewhere.
Source: U.S. government