What happened

Chinese stocks were diving today, once again on fears of a regulatory crackdown by the Chinese government. This time the focus was on Chinese education stocks as a number of news outlets reported that officials may ask Chinese tutoring companies like TAL Education Group and New Oriental Education Group to become nonprofits, a move that would have obvious consequences for investors. Those two stocks and other Chinese education stocks lost more than half of their value today.

The fallout hit Chinese stocks broadly and came as fears have been mounting over intervention from the Chinese Communist Party. Those include Beijing's slapping restrictions on ridesharing giant recent IPO Didi Global earlier this month and fining Alibaba Group Holding $2.8 billion in April over antitrust violations.

Among the losers today were GDS Holdings (NASDAQ:GDS), which was down 12.8% as of 12:30 p.m. EDT; Full Truck Alliance (NYSE:YMM), which was off 24.6%; KE Holdings (NYSE:BEKE), which had lost 18.8%; JD.com (NASDAQ:JD), which had given up 5.8%, and Bilibili (NASDAQ:BILI), which was down 14.5%.

Chinese and American currency.

Image source: Getty Images.

So what

The threats against the education sector were the biggest reason for the sell-off, but they weren't the only one. Morgan Stanley also downgraded GDS Holdings, which operates data centers in China. The Wall Street bank lowered its rating on the stock to equal weight, saying it was concerned about unfavorable power quota allocations in Shanghai, another potential sign of the impact of government regulations.

Other Chinese stocks that are down today have also faced the ire of Beijing in the past. Digital media company Bilibili's app was removed from Chinese app stores over censorship issues back in 2018, and e-commerce giant JD.com has not been directly targeted by Beijing but has fallen in sympathy with Alibaba on fears of a broader crackdown on e-commerce marketplaces.

Digital freight platform Full Truck Alliance had its initial public offering just a month ago, but the timing seems to be unfortunate as Didi's IPO came shortly after and Didi stock fell after its apps were removed from China's biggest app stores on concerns about data collection. Full Truck Alliance shares are now down more than 40% from their $19 IPO price.

Finally, real estate tech company KE Holdings also competes in the kind of data-rich environment that has attracted negative attention from Chinese regulators, meaning investors in the stock are particularly sensitive to the government's machinations.

Now what

In addition to pressure coming from Beijing, The U.S. government has also threatened Chinese stocks in recent months. The Department of Defense published an "entity list" with several stocks it said would be delisted from American exchanges for acting as agents of the Chinese government and military.

Separately, another law will delist U.S-listed Chinese companies like Alibaba if they don't make their audits available to U.S. regulators. The timeline for enforcement on that is unclear, however.

Altogether, the environment has become significantly hostile toward Chinese stocks as American investors fear Beijing's unpredictable overreaches, and the threat of delisting also looms. If these stocks were delisted, they would continue trade on other exchanges, like in Hong Kong, and a number of Chinese stocks have IPO'd in Hong Kong for that reason.

While many of these stocks, like Alibaba, trade for dirt cheap valuations, with investor sentiment the way it is, these stocks could be value traps. The good news is that they will get another chance to show off their business success in the coming weeks as earnings reports roll in.

Nonetheless, the stocks seem unlikely to return to their previous levels until pressure from Beijing cools off.

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.