What happened
Shares of the large Chinese real estate platform KE Holdings (BEKE -1.33%) took a breather this morning after a stunning run yesterday that sent the stock up more than 60%. The large run happened after Chinese regulators signaled support for Chinese stocks listed on U.S. exchanges. KE Holdings traded more than 18% lower as of 10:30 a.m. EST today.
So what
Last week, the Securities and Exchange Commission named five Chinese stocks trading on U.S. exchanges that could be delisted for violating U.S. securities law. The issue for Chinese stocks is that U.S. regulators want to thoroughly review their financials as they do with domestic stocks.
However, the Chinese government essentially prohibits foreign accountants from reviewing the financials of Chinese firms. By law in the U.S., if regulators can't audit companies for three years in a row, then they can't trade on U.S. exchanges.
Image source: Getty Images.
The dispute took a positive turn yesterday when Chinese regulators said they were in talks with their U.S. counterparts over a way to settle the issue. Furthermore, Chinese regulators signaled support for Chinese stocks listed on foreign exchanges, in stark contrast to some of their actions in recent years that have really cracked down on their tech and real estate sectors.
Speaking to Yahoo! Finance yesterday, Thomas Hayes, chairman of investment firm Great Hill Capital, called the reversal a "sea change," adding, "A day ago or a week ago, if you had asked money managers, 'What's the last thing that you'd like to own in your portfolio?' they would have all said China."
Now what
Investors used to be quite bullish on Chinese stocks due to the huge addressable market, but the influence that regulators in China can have and their souring approach to foreign listings had sent many Chinese stocks into free fall. Even after its run yesterday, KE Holdings is still down about 64% since going public in 2020.
Investors might be pocketing gains after yesterday's big run. They may also be taking a breather today due to the Federal Reserve starting to raise its benchmark overnight lending rate yesterday and announcing there could be another six rate hikes in 2022. Rising interest rates can put a damper on tech and real estate stocks.
The new attitude from Beijing is certainly a positive development for Chinese stocks listed on U.S. exchanges, but understand that regulators can change their minds quickly, creating lots of volatility potential in this sector.
