What happened
It's Wednesday, and Chinese stocks are in trouble again.
As of 11:50 a.m. ET, shares of Chinese companies large and small, from internet giants Alibaba Group Holding (BABA 0.64%) and JD.com (JD 1.13%) to tiny e-cigarette maker RLX Technology (RLX 2.14%), are falling across the board, down 6.6%, 8.9%, and 8%, respectively.
Image source: Getty Images.
So what
What's ailing the market for Chinese stocks this time?
Earlier this month, the U.S. Securities and Exchange Commission (SEC) effectively torpedoed demand for Chinese equities when it passed new rules under the Holding Foreign Companies Accountable Act, and declared, "If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the PCAOB [Public Company Accounting Oversight Board]."
Today, giant global asset management firm TCW Group, with $266 billion in assets under management, warned that the situation for U.S. investors in Chinese equities may be fully as bad as that sounds. As CNBC reported this morning, TCW managing director for emerging markets sovereign research David Loevinger observed that for 20 years, the U.S. has been asking nicely for China to permit greater transparency into the finances of its publicly traded companies -- but to no avail. Under the new rules, delisting isn't mandated unless a Chinese company fails to comply with the rules for three consecutive years, but "the next few years" aren't likely to change China's tune, says Loevinger.
Therefore, he told CNBC today, "it's essentially game over" for Chinese stocks trading in the U.S.
Now what
What does this mean for investors who own shares of Alibaba, JD, and RLX? It could mean that the SEC will move to forcibly delist the stocks from the New York Stock Exchange and Nasdaq Stock Market. Or it could mean the stocks will voluntarily delist, as DiDi Global is in the process of doing.
Either way, though, "by 2024, most Chinese companies listed on U.S. exchanges are no longer going to be listed in the United States," predicts Loevinger. Granted, if you own the shares now, you'll still technically own them then -- but you won't be able to trade them here. Instead, you'll need to figure out a way to sell your stocks on the Shanghai or Hong Kong stock exchanges to which these companies' shares will likely retreat.
This will have two effects for investors. First, long-term, Chinese stocks will lose "access to a broad pool of buyers, sellers and intermediaries," concludes CNBC. That will mean less demand for the stocks, and presumably lower valuations for them as well -- not a good long-term prospect for investors. The more immediate risk, however, is probably the greater risk: Anticipating lower valuations for their shares, and anticipating the trouble they will face in trying to exit Chinese equity positions in the future, investors in these stocks may decide to sell before this crisis comes to a head.
And with shares of Alibaba, JD, and RLX in free fall, that seems to be precisely what's happening today.
