What happened
Chinese tech stocks are in the news again Thursday, and not in a good way.
As the South China Morning Post (SCMP) reports, the U.S. Securities and Exchange Commission (SEC) just added five more China-based-but-U.S.-listed companies to its list of stocks at risk of delisting over disclosure concerns. Shares of Alibaba Group Holding Limited (BABA 0.59%), Baidu (BIDU 0.62%), iQIYI (IQ 3.53%), and Futu Holdings (FUTU 5.37%) are all down significantly in response.
As of 10:30 a.m. ET, Alibaba stock is off 4.7%, Baidu 7%, and iQIYI 8.5%, and Futu Holdings is leading the sector lower with a 9.7% loss.
Image source: Getty Images.
So what
For those not familiar, Alibaba is the e-commerce powerhouse of China, Baidu the country's biggest search engine, iQIYI an internet streaming giant, and Futu an online stock broker (curiously enough!), so these are all pretty high-profile targets the SEC has picked for future enforcement actions.
As it turns out, one of these stocks -- Alibaba Group -- is not on the list of five companies targeted by the SEC's action today. (Baidu, iQIYI, and Futu all are). But whether they're on the list or off it, investors are selling Chinese stocks en masse today. Why?
To review: The SEC is concerned that certain foreign companies, and Chinese companies in particular, are not being sufficiently transparent in their financial reports, and that this could potentially mislead U.S. investors. To address this issue, two years ago Congress passed a law permitting the SEC to delist such stocks -- i.e., forbid them from trading on U.S. stock exchanges -- if they don't mend their ways.
Under the Holding Foreign Companies Accountable Act (HFCAA) of 2020, Congress authorized the SEC to draw up a list of companies at risk of delisting and to publish this list before delisting so that "investors and market participants ... have sufficient notice regarding whether a security that they hold or plan to hold is [at] risk that such security may be subject to a trading prohibition in the future."
Now what
This is the list we're talking about today, and it's the fact that Baidu, iQIYI, and Futu just got added to it that is spooking investors. It's the fear that Alibaba will later be added to the list that's weighing on that stock.
Is it a valid fear? As SCMP admits, "[The Chinese government] does not allow audit and accounting data to be taken offshore," and this is interfering with all Chinese companies' ability to comply with the HFCAA law. Theoretically at least, any company that is based in China, but listed on a U.S. stock exchange, will eventually be delisted unless China changes its policy. The good news is that, as SCMP also reports, the Chinese government has "empowered" its China Securities Regulatory Commission "to find a mechanism to comply with overseas accounting regulations," and "a new approach is being considered, where China's finance ministry vets the audit data for state secrets and personal information before handing it over" for review by U.S. auditors.
In short, just because these companies have been added to the SEC's list today doesn't mean they won't eventually be able to get off the list. There's still hope -- even if it seems in short supply today.
