What happened
Chinese tech stocks continued to move higher Monday morning as further details emerged on a Chinese government effort to save China-based, U.S.-listed stocks from being delisted.
As of 10:10 a.m. ET, shares of Alibaba Group Holding (BABA -2.67%) had gained 6.2%, iQIYI (IQ -2.33%) was rising 11.5%, and Pinduoduo (PDD -0.71%) was leading the sector higher with a 14.8% gain.
Image source: Getty Images.
So what
To recap, U.S.-listed Chinese stocks have been under pressure for a number of reasons for the past year, not the least of which is a threat from the U.S. Securities and Exchange Commission (SEC) to delist them for:
- Refusing to permit the U.S. Public Company Accounting Oversight Board (PCAOB) to inspect data from their financial audits.
- Failing to disclose Chinese government ownership stakes in these companies.
- Failing to adequately describe risks inherent in their ownership structures.
The companies themselves may not be at fault for these failures; rather, Chinese government policy forbids such disclosures in the interest of national security. Nevertheless, in accordance with the requirements of the U.S. Holding Foreign Companies Accountable Act (HFCAA), the SEC has begun drawing up lists of Chinese companies that may be delisted for failing to disclose the necessary information. Investors are spooked, and Chinese stocks have suffered from waves of selling on fears they will eventually be delisted from U.S. stock exchanges.
This situation got a little better over the weekend, after Barron's reported on a Chinese-language joint statement from the China Securities Regulatory Commission (CSRC) -- and this is why the stocks are going up today. An imperfect translation of this document, says Barron's, suggests that China may be prepared to "loosen its auditing rules" by "removing the legal requirement that on-site inspections be mainly conducted by Chinese authorities or rely on their inspection results." China may also be willing to set up "secure, efficient cross-border regulatory cooperation" between the CSRC and the SEC and PCAOB to improve transparency.
Now what
So far, so good. Now here's where things get tricky: Just because China has proposed compromises does not mean that the SEC will agree they are sufficient. "There is still high uncertainty for getting a consensus from the U.S.," commented investment bank Guotai Junan Securities analyst Danny Law.
In particular, Law cautioned Barron's that China is still going to want to restrict access to data that it "deems sensitive" -- and indeed, that restrictions on access to such data remains enshrined in Chinese law. If it turns out that the CSRC's offer to "cooperate" with the SEC doesn't result in any actual changes in transparency, then today's good news could turn into no news fast -- and today's gains in Chinese stock prices could disappear just as quickly.
