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Why Shares of LexinFintech Holdings, Lufax Holding, and 360 DigiTech All Fell Today

By Bram Berkowitz - Jul 9, 2021 at 7:22AM

Key Points

  • China's State Council said it plans to change the rules regarding Chinese companies listing on foreign stock exchanges.
  • The Chinese ride-hailing app Didi, which recently went public in the U.S., saw shares plunge after Chinese authorities removed its app from app stores in China due to cybersecurity concerns.
  • Since then, other Chinese tech companies have seen sell-offs as well, as investors fear further restrictions and intervention from the Chinese government.

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Shares of these Chinese fintech companies are suffering as regulators increase their oversight on Chinese companies listing on American stock exchanges.

What happened

Shares of several Chinese fintech companies took a hit Thursday following recent news that the Chinese government plans to intensify its supervision of Chinese companies that trade on U.S. stock exchanges.

Shares of the consumer finance company LexinFintech Holdings Ltd-ADR (LX 0.00%) fell 12.7%, while shares of the personal financial services platform Lufax Holding Ltd-ADR (LU -1.99%) fell more than 16%. Additionally, shares of 360 DigiTech Inc (QFIN -3.83%), a digital platform that helps other financial institutions connect with customers, fell nearly 21.5%.

So what

When Chinese companies list on U.S. stock exchanges like the New York Stock Exchange, American investors can purchase shares in them through American depositary receipts (ADR). This year, a lot of Chinese companies have been volatile and seen shares soar higher at times, making them increasingly popular among U.S. investors. In particular, Chinese fintech companies are attractive because of the huge opportunity presented by China's population and economy.

But recently, CNBC reported that China's State Council plans to change the rules of "the overseas listing system for domestic enterprises," which could prove detrimental to future Chinese initial public offerings and current ADR listings.

"U.S. investors will have to weigh the risks of owning ADRs at a time when tensions between Beijing and Washington remain elevated while all global investors will have to balance the allure of China's vast addressable market with the possibility that officials may reshape company prospects at the stroke of a pen via the imposition of regulatory strictures," Peter Berezin of BCA Research wrote in a note.

Red line with arrow moving downward.

Image source: Getty Images.

The ride-hailing app DiDi Global Inc-ADR (DIDI 0.35%) got a taste of this when it went public on June 30, raising $4.4 billion, only to see its shares drop 20% Tuesday after Chinese authorities announced that due to cybersecurity risks, they would remove the app from app stores in China. Hedge fund manager Kyle Bass on CNN used a veiled expletive in describing the move, which he saw as directed squarely at the United States.

Shares of 360 DigiTech also seem to be falling after Seeking Alpha reported that people on Chinese social media are saying the company's 360 IOU app, one of the company's core products, had been removed from app stores.

Now what

While it's clear that ADR stocks are popular among investors and have potential, there are other geopolitical forces at work now, making these stocks a lot more unpredictable. Chinese regulators can move quickly and decisively -- they recently displayed this while cracking down on the mining of cryptocurrencies in the country.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

360 Finance, Inc. Stock Quote
360 Finance, Inc.
$14.81 (-3.83%) $0.59
LexinFintech Holdings Ltd. Stock Quote
LexinFintech Holdings Ltd.
$1.99 (0.00%) $0.00
Lufax Holding Ltd Stock Quote
Lufax Holding Ltd
$3.94 (-1.99%) $0.08
DiDi Global Inc. Stock Quote
DiDi Global Inc.
$2.89 (0.35%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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