What happened
Shares of Tencent Holdings (TCEHY 3.23%), Pinduoduo (PDD -0.37%), and Trip.com (TCOM 0.24%) were plummeting today, down 10%, 20.5%, and 13.5%, respectively, as of the end of trading.
There was a trifecta of bad news today regarding Chinese stocks. First, the Wall Street Journal reported that Tencent is facing a potential fine, in another chapter in China's year-long regulatory crackdown on its tech sector.
Second, China is experiencing an Omicron outbreak, and therefore the government is locking down several key cities, including technology hub Shenhzen.
Finally, investors maybe nervous about China's ties to Russia, as geopolitical tensions not only call into question the health of the Chinese economy, but the status of U.S.-listed shares such as Pinduoduo and Trip.com.
So what
According to the WSJ who have spoken to people familiar with the matter, China's central bank found during an inspection late last year that WeChat Pay, which is Tencent's fintech arm, had lapses in "know your customer" compliance regulations, and also found that WeChat Pay had allowed the transfer of funds for illegal purposes such as gambling.
This is somewhat surprising, as up until now Tencent had avoided most of the regulatory crackdown and was known as a good corporate citizen, while regulators had leaned more heavily on rival Alibaba (BABA 2.92%) for violations. According to the report, Tencent could be fined in the hundreds of millions of Yuan -- although this wouldn't be too game-changing for a company as large as Tencent, as one U.S. dollar equals about 6.4 Yuan.
Still, that is compounding other problems. Over the weekend, it was reported that Russia had asked China for military aid and assistance in its war with Ukraine. Although China has denied that and nothing has been confirmed, it appears people are panicking that Chinese companies could be sanctioned. Last week, the Securities and Exchange Commission began to flag Chinese companies for noncompliance with the recently passed Holding Foreign Companies Accountable Act, or HFCAA. That law gives Chinese firms three years to open up their books to U.S. regulators or risk being delisted.
Although Tencent does not list shares on U.S. exchanges, Pinduoduo and Trip.com do list their stocks on the Nasdaq. So U.S. investors may be selling these shares regardless of where they're priced.
In addition, Chinese online travel agent Trip.com could feel the pinch from renewed lockdowns in the country. China's vaccines are not quite as effective as the mRNA vaccines we have here in the U.S., and it pursues a "zero COVID" posture. Therefore, the recent omicron breakout has the potential to lock down the country further, which could affect Chinese travel.
And Pinduoduo may also be feeling the fallout from the potential Tencent fine. Tencent owns a mid-teens stake in Pinduoduo, and regulators have been known to go after excessive fees on marketplaces or predatory pricing as part of the regulatory clampdown. In addition, any weakness in the Chinese economy could affect any stocks dependent on economic growth, e-commerce players like Pinduoduo included.
Image source: Getty Images.
Now what
Warren Buffett once said, "be greedy when others are fearful," and there is certainly a lot of fear in Chinese stocks right now. Many are down significantly and also trade very cheaply to their U.S. peers. The Golden Dragon Index, which tracks Chinese American Depository Receipts, was down over 10% both Thursday and Friday, which has never happened before in its 22-year history. On Monday, it was down another 13%!
While this may seem like a golden opportunity for value investors, there is still high risk. The potential de-listing of stocks trading on U.S. exchanges could cause more selling, so if you are interested in diving in, you should probably attempt to purchase Chinese stocks on the Hong Kong Stock Exchange, if your broker allows it.
Still, with China's economy slowing, the ongoing technology regulatory campaign ongoing, and China still maintaining a close relationship with Russia, the potential for sanctions and more regulations remains high. This could be a buying opportunity, but only for highly risk-on investors.
All three companies report earnings next week, which give investors more color on the matter.
