Following months of speculation, Chinese ride-hailing app Didi announced last week that it would delist from the New York Stock Exchange and pursue a listing in Hong Kong.
Delisting means a Chinese company traded on an exchange like the Nasdaq or New York Stork Exchange would lose access to a broad pool of buyers, sellers and intermediaries. The centralization of these different market participants helps create what’s called liquidity, which in turn allows investors to quickly turn their holdings into cash.
Once a stock is delisted, the company’s shares can keep trading through a process known as “over-the-counter.” But it also means the stock is outside the system of major financial institutions, deep liquidity and the ability for sellers to find a buyer quickly without losing money.
In the event of a stock’s delisting from New York, investors could exchange their U.S.-listed shares for the Hong Kong-listed ones. Not all U.S.-listed Chinese companies are eligible for secondary listings in Hong Kong, Morgan Stanley analysts noted.
While the Chinese government has yet to outright ban foreign listings, new rules announced this summer have discouraged what was once a rush of Chinese IPOs in the U.S.
The regulations so far range from data security reviews to industry-specific restrictions on the use of the variable interest entity structure. A VIE creates a listing through an offshore shell company, preventing investors in the U.S.-listed stock from having majority voting rights over the business. The structure is commonly used by Chinese IPOs in the U.S.