What happened
China stocks staged a remarkable rally on Wednesday, with shares of internet giant Alibaba (BABA 0.27%), for example, surging ahead a staggering 36.8% in one single session, online gamer Bilibili (BILI 0.04%) jumping a mind-boggling 47.6%, and video streamer iQIYI (IQ 2.34%) coming this close to a 50% gain in one single day -- up 49.8%.
Does anyone think that now might be a good time to take some profits? Wall Street certainly does. As of 11:05 a.m. ET Thursday morning, Alibaba stock is down 8.3%, iQIYI has lost 14.6%, and Bilibili is down a solid 16%.
Image source: Getty Images.
So what
And to be clear: Yes, I do believe that what we are seeing today is simple profit taking as investors cash in on yesterday's astounding run. There is, after all, basically no new news on the wires regarding any of these three stocks today -- no analyst upgrades, no press releases from the companies themselves.
Granted, there was some good news yesterday, which sparked the rally.
In China, Vice Premier Liu He announced his intention to ensure Chinese business regulations are more "transparent and predictable" in the future. China's securities regulators say they will also work with the SEC "to cooperate over accounting oversight of U.S.-listed Chinese companies." And in general, China said it plans to be more "supportive" of its foreign-listed companies, says The Wall Street Journal.
In the context of a market that had become exceedingly skeptical of Chinese stocks (I believe one analyst went so far as to call the entire country of China "uninvestable"), all of the above combined to create one gigantic short squeeze, driving Chinese equity prices higher.
Now what
Today, it appears that the momentum provided by that squeeze is spent, and now the worries are returning.
Contrary to what investors may have assumed from yesterday's headlines, Bloomberg reminded investors yesterday evening that the U.S. Public Company Accountability Oversight Board is still "insisting that Beijing provide complete access to audits of Chinese companies that trade in New York." And that sounds less like the PCAOB will negotiate some kind of compromise with its Chinese counterparts, and more like it's setting a "high bar for any deal that allows the firms to maintain their American listings," says Bloomberg.
"The PCAOB must be able to inspect and investigate these audit firms completely [and] all firms auditing public companies must play by the same rules," insisted the PCAOB in a statement. Failing that, each of Alibaba, iQIYI, and Bilibili still face the prospect of being delisted from U.S. stock exchanges.
In the face of this continuing threat, it's hard to see how yesterday's rally could have continued very long in any case. Today's sell-off, I fear, was inevitable.
