Major benchmarks were modestly lower on Friday morning, with most investors still showing some worry about the fragile state of the U.S. economy in the wake of the coronavirus pandemic. The Nasdaq Composite (NASDAQINDEX:^IXIC) fell 0.25% shortly after 11:30 a.m. EDT, faring somewhat better than the broader market in a familiar pattern. The Nasdaq 100 of larger Nasdaq-listed stocks fell by a similar percentage.
However, the news for Nasdaq 100 components Baidu (NASDAQ:BIDU) and NetEase (NASDAQ:NTES) wasn't as good, as both stocks posted much larger losses of 5% to 6%. At issue is a movement that's picking up steam, aimed at keeping Chinese companies from remaining listed on U.S. stock exchanges. After some recent fraud issues, the move is understandable, but shareholders in these two major stocks aren't happy about the ramifications.
Chinese stocks are under attack
Washington has had a tough relationship with Beijing for years now, with issues ranging from trade disputes and tariffs to mishandling of intellectual property. Lawmakers have sought ways to protect U.S. companies from adverse business practices in China, but their lack of progress has made some impatient to take more aggressive action.
Accordingly, the Senate passed a bill earlier this week that could potentially prevent foreign companies from listing their shares on U.S. stock markets. Under the Holding Foreign Companies Accountable Act, companies would have to demonstrate their independence from foreign government ownership and control, as well as submit financial statements for a U.S.-based oversight audit.
That might not seem like such a large barrier, but legal issues in China could make it difficult or impossible for Chinese companies to comply. Already, Baidu has said that it will consider delisting its stock from the Nasdaq if the legislation goes into effect. With lawmakers having identified Baidu along with a host of other popular Chinese stocks as potentially affected by the legislation, it could be tough for investors interested in Chinese companies to maintain their access as U.S. investors under the law.
Should you avoid Chinese stocks?
Recent events with some Chinese companies have been painful for shareholders, highlighting the potential impact of fraud on investors. Yet fraud isn't something that's limited to China. Some of the biggest scandals in stock market history have happened with U.S. companies, including Enron and WorldCom in the 2000s.
What is true, though, is that investing internationally takes more effort. Language barriers can prove problematic, and the disclosures required under foreign law are sometimes different from what you'd expect to see from a U.S. company.
Nevertheless, some of the best investing opportunities have come from Chinese companies. NetEase, for example, has been hugely successful, building up its video game business into a global colossus and finding ways to try to expand the scope of its enterprise over time. Baidu has faced longer struggles, but it maintains a commanding role in internet search within China.
Investors shouldn't lose hope for their ability to keep investing in Chinese stocks, but they should be vigilant. When even massive enterprises like NetEase and Baidu are threatened, it points to a major shift in what has helped the U.S. keep its position as a major financial center for businesses across the globe.