A trade war can be fought on many fronts. As China breeds unicorns, they are being asked to stay at home rather than gallop overseas to enrich US investors.

The US pipeline of Chinese initial public offerings has been light since President Donald Trump started making noises about tariffs in early March. The only billion-dollar offering is the pending sale by e-commerce site Pinduoduo, for which an American listing makes sense because it competes directly with Alibaba Group Holding Ltd and JD.com Inc., which already trade there.

Hong Kong, by contrast, has seen a stampede, including the $3.1 billion IPO by Xiaomi Corp. and a planned offering by Meituan Dianping, the world’s third- and fourth-most valuable unicorns. In the US, 17 Chinese startups filed with the Securities and Exchange Commission since March for a combined deal size of $3 billion; in Hong Kong, there were 27 candidates seeking an aggregate $10.5 billion, data compiled by Bloomberg show.

It might be argued that unicorns -- defined as startups with a value exceeding $1 billion -- can expect a better reception in Hong Kong. The exchange doesn’t have enough fast-growing tech firms: Information technology and health care constitute less than 10 percent of the Hang Seng Composite Index, compared with 40 percent for the S&P 500.

That’s a misconception, though: US investors adore Chinese unicorns. The KraneShares CSI China Internet Fund, an exchange-traded fund that tracks US-listed Chinese technology firms, outperformed the S&P 500 by an annualized 5.9 percentage points since its inception in August 2013.

Even this year, Chinese American depositary receipts are doing relatively better than the Hong Kong market: The KraneShares ETF is broadly flat, versus a 6 percent decline in the Hang Seng Index.

From Beijing’s perspective, China’s middle class is missing out. While the country’s consumers are contributing billions in sales to unicorns, US investors are pocketing the capital gains from their stocks.

China Renaissance Holdings Ltd., the investment-bank-cum-asset-manager that advises the nation’s hottest tech startups, is a good indicator of which way the policy winds are blowing. The firm is planning to list in Hong Kong and is looking for a $4 billion to $5 billion valuation, according to Reuters.

That’s notable because Hong Kong is a poor destination for such a company.

The reason is carried interest, which is a private equity manager’s share of profits in excess of the amount that’s contributed to the partnership. Under US generally accepted accounting principles, or GAAP, asset managers can choose whether to include carried interest in revenue -- and they all do. Sales at KKR & Co. would have been $275 million lower in 2017, a shortfall of more than 5 percent, if carried interest had been excluded.

But Hong Kong follows international financial reporting standards, or IFRS, which have stricter rules on carried interest. China Renaissance can’t include the item on its income statement unless it returns the money and closes its funds first. This matters because under IFRS, China Renaissance would have barely broken even in 2017 and would have incurred a $65 million net loss in the first three months of this year. Under GAAP, the numbers would have been a lot prettier.

That’s why China Renaissance took pains in its prospectus to show its “non-IFRS measures.” The firm’s investment-banking business is low margin and slowing, while its crown jewel investment-management arm -- which relies on carried interest -- is exploding with the unicorns.

Plus, China Renaissance is no stranger to the US IPO market, having taken startups such as iQiyi Inc, YY Inc. and Momo Inc. public. If anything, it’s less familiar with the Hong Kong market.

That all reinforces the impression that the asset manager is only choosing Hong Kong to please Beijing and demonstrate to its unicorn investments that the city is indeed a desirable place to list.

China’s government mouthpieces love to say there are no winners in a trade war. That’s true. There are certainly losers, though.


Shuli Ren
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. -- Ed.

(Bloomberg)