What happened
Shares of Chinese stocks listed on U.S. exchanges struggled today as the situation between U.S. and Chinese financial regulators continued to play out. Recently, the Securities and Exchange Commission (SEC) has added more Chinese stocks that face being delisted.
Shares of JD.com (JD 2.08%) had fallen nearly 6% as of 1:03 p.m. ET today. Shares of DiDi Global (DIDI 2.33%) had sunk more than 9% and shares of Up Fintech Holding (TIGR 5.30%) traded nearly 11% down.
So what
For decades now, U.S. and Chinese regulators have been at odds over the auditing of Chinese stocks that trade on U.S. exchanges. U.S. regulators want to fully review Chinese company financials like they do with U.S.-based stocks. However, Chinese regulators don't allow foreign accountants to review current Chinese company financials due to national security concerns.
The argument came to a boiling point in 2020 when U.S. lawmakers passed the Holding Foreign Companies Accountable Act (HFCAA), which would delist Chinese stocks if U.S. regulators can not review their financials for three consecutive years. Recently, U.S. regulators took more steps to uphold the law by specifically listing names of Chinese companies that face being delisted. The first five were Yum China Holdings, ACM Research, BeiGene, Zai Lab, and Hutchmed. Potentially 200 Chinese stocks could face delisting due to the HFCAA.
Image source: Getty Images.
However, shortly after the SEC specifically named companies that face delisting, Chinese regulators surprised the market and voiced support for foreign-listed Chinese stocks. They even said they would work with U.S. regulators on a cooperation agreement to solve the long-standing auditing issue. Following this news, Chinese stocks soared and enjoyed their best day of trading in years.
Since then, the situation has shown that it may be more difficult to solve than initially believed. The SEC has added more Chinese companies that face delisting threats, including Weibo. This week, the SEC added Baidu, as well as Futu Holdings Limited, Nocera, iQIYI, and CASI Pharmaceuticals as potential delisting candidates.
"There have been thoughtful, respectful, productive conversations, but I don't know where this is going to end up," SEC Commissioner Gary Gensler said earlier this week, according to Bloomberg, referring to a potential agreement over the auditing issue. "It's up to the Chinese authorities, and it could be frankly a hard set of choices for them."
Similar to Futu, Up Fintech is an online brokerage, so investors may see the fact that Futu has now joined the list as a precursor of what's to come.
DiDi is also in interesting shape because toward the end of 2021 the company had announced that it planned to delist from the New York Stock Exchange and list its shares in Hong Kong. But not long ago, Chinese regulators shut this plan down, at least for the time being, citing security and data concerns. Now, China's largest ride-hailing company may not have a lot of options if it were to delist from the New York Stock Exchange.
Now what
The fact that Chinese regulators signaled support for foreign-listed Chinese stocks is certainly good news. But it's also clear that U.S. regulators have taken a hard line on their position, as they continue to name stocks that face delisting and say that Chinese companies will need to be in full compliance with U.S. auditing laws.
That may be a difficult pill for Chinese authorities to swallow, considering this issue has gone on for decades. While Chinese stocks have been hammered and there is upside, given their large market opportunities and if regulators come to terms on the auditing issue, I see these stocks as particularly risky trades right now because so much depends on regulators.
