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4 Lessons From China Mobile's Delisting Debacle

By Leo Sun - Jan 7, 2021 at 11:09AM

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China's largest telecom stocks have become toxic investments.

China Mobile ( CHL ), the largest telecom company in China, and its two smaller peers, China Telecom ( CHA ) and China Unicom ( CHU ), were all recently targeted with a delisting order from the Trump administration.

Last November, President Donald Trump issued an executive order that barred American citizens from purchasing shares of U.S.-listed Chinese companies with alleged ties to the Chinese military after Jan. 11. Selling existing positions in those securities would be permitted until Nov. 11. All three telcos were included on that list.

On New Year's Eve, the New York Stock Exchange announced it would suspend trading in all three companies from Jan. 7 to Jan. 11 and start the delisting process. The announcement caused all three stocks to tumble.

Chess pawns painted with the colors of the Chinese and American flags.

Image source: Getty Images.

But on Jan. 4, the NYSE abruptly reversed that decision and said it wouldn't delist the three telcos -- and then just two days later, it flipped its position again and said the delistings would proceed.

Shortly afterward, many brokerages notified investors that all trading in the three stocks would be restricted on Jan. 8 and that any position that wasn't closed would remain locked until the restrictions were lifted. As of this writing, it isn't clear if investors can still sell their shares after Jan. 8.

As expected, this chaotic sequence of events rocked the three telcos and other U.S.-listed Chinese stocks. Let's examine the four key lessons investors can learn from this mess, and whether or not it's time to sell these targeted stocks.

1. It's too risky to hold state-backed Chinese companies

It's unclear if China Mobile, China Telecom, and China Unicom actually have connections to the Chinese military, but they are all certainly state-backed enterprises.

Last December, President Trump approved a new law that would delist all foreign companies that can't prove they aren't controlled by a foreign government. If a company fails to do so through U.S.-approved audits for three consecutive years, it will be delisted from U.S. exchanges.

All three telecom companies would have been delisted by that law, since it's unlikely the Chinese government will divest its stakes to appease the U.S. government. Therefore, these stocks' days were already numbered.

2. The order won't hurt the three telecom companies

The shares of China Mobile, China Telecom, and China Unicom that trade on the NYSE are merely fragments of their subsidiaries. According to China's Securities Regulatory Commission, the NYSE-listed ADR shares of all three telecom companies represent just 2% of the respective companies' outstanding shares, so the de-listings won't hurt their core businesses.

Instead, the delisting order will hurt U.S. investors, who will be forced to liquidate their holdings, as well as the funds that hold these stocks and the NYSE -- which could struggle with the loss of listing fees from Chinese companies.

3. Retreating to OTC and overseas markets isn't an option

Some investors likely assume the delisted stocks would simply be moved to an OTC (over-the-counter) exchange, where they could continue trading, or they could trade their ADRs for Hong Kong-listed shares.

A declining stock chart.

Image source: Getty Images.

However, the new law targeting China's state-backed enterprises specifically bars delisted Chinese companies from retreating to OTC markets. It also prevents U.S. citizens from owning the shares on other exchanges.

The three telecom companies are directing their ADR holders to trade their shares for the Hong Kong-listed shares through a custodian bank, but that option could be limited to non-U.S. investors. Many U.S. brokerages also don't offer access to overseas exchanges.

In short, if you believe the executive order will remain in effect after President-elect Joe Biden takes office, it might be smarter to liquidate your position before it gets frozen.

4. Don't count on President-elect Biden to undo the order

If you believe President-elect Biden will undo the executive order after he takes office on Jan. 20, the three telecom stocks might look like tempting investments with their low P/E ratios and high dividend yields.

But I doubt this will happen, for two reasons. First, the new law targeting China's state-backed enterprises was passed with bipartisan support in the House and Senate. It's unlikely that Biden will undo Trump's executive order if it's considered an extension of that law.

Second, President-elect Biden will face pressure from both parties to maintain pressure on China after he takes office. Undoing Trump's executive order could be considered a sign of weakness in both the U.S. and China.

Should investors sell their Chinese telecom stocks now?

I personally own shares of China Mobile, and I previously promoted it as a stable dividend stock with a low valuation. However, the rapidly shifting situation indicates it's time to close this position and stick with safer domestic dividend stocks instead. I'll need to take a loss here, but it's better than getting stuck with a frozen position that I can't liquidate in the future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

China Mobile Limited Stock Quote
China Mobile Limited
China Unicom (Hong Kong) Limited Stock Quote
China Unicom (Hong Kong) Limited
China Telecom Corporation Limited Stock Quote
China Telecom Corporation Limited

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