What happened

On a day when the broader U.S. market was down sharply, shares of several Chinese stocks listed on U.S. exchanges fell by even larger percentages as investors continue to ponder the ongoing disagreements between U.S. and Chinese financial regulators.

Shares of JD.Com (JD -2.15%) were trading nearly 7% lower as of 12:51 p.m. ET Thursday, while shares of Alibaba (BABA -1.58%) were nearly 7% lower and shares of real estate platform operator KE Holdings (BEKE -3.33%) were down more than 9%.

So what

Chinese companies listed on U.S. exchanges face a unique potential headwind as regulators in China and the U.S. work to find a mutually acceptable resolution to a decades-long dispute over how those companies are audited. The Chinese government has long barred foreign accountants from viewing the working financial statements of Chinese companies and blocked the inspection of the auditors of those companies due to what it describes as national security concerns. But U.S. regulators such as the Securities and Exchange Commission (SEC) want these Chinese companies to comply with the same rules as all other businesses listed on U.S. exchanges.

In 2020, Congress passed the Holding Foreign Companies Accountable Act (HFCAA), which said that foreign companies would be delisted from U.S. exchanges if regulators could not audit their financials for three consecutive years. Then, earlier this year, the SEC began specifically naming Chinese stocks that are at risk of being delisted. Following this, the Chinese government made a statement that it planned to act in support of Chinese stocks, and further said it would make an effort to come to an agreement with U.S. financial regulators. Media reports suggest there has been progress, citing anonymous sources that say Chinese regulators are preparing to give U.S. regulators full access to the necessary data, potentially in the next few months.

Red line with arrow trending downward.

Image source: Getty Images.

Still, no agreement is yet in place, and perhaps to show that it means business, the SEC continues to name specific Chinese companies that face delisting. It recently pointed to JD.Com as one of them. But analysts say this should not overly concern the market.

"The addition of these names to SEC's list is within expectation and part of the process that was announced previously. With so many names on the list the market should no longer view it as a material event," Vey-sern Ling of Union Bancaire Privee was quoted as saying in a Bloomberg article.

KE Holdings operates an online platform Beike matches would-be homebuyers with home sellers. Currently,  it trades on the New York Stock Exchange. But on Thursday, it announced plans to become dual-listed on both the NYSE and the Stock Exchange of Hong Kong, joining a trend of what some have been calling "homecoming" listings for Chinese companies. In a regulatory filing on April 22, KE Holdings said that in response to the HFCAA and what is going on with regulators, "the Company has been actively exploring possible solutions to protect the interest of its stakeholders." When it lists in Hong Kong, KE will not raise capital or issue any additional shares.

Now what

Based on multiple statements from the government in Beijing related to the auditing issue, its pledges to do more to stimulate the Chinese economy, and its much friendlier recent tone toward Chinese tech companies, I am getting more optimistic that U.S. and Chinese regulators will come to an agreement that removes the delisting threat. I am also more optimistic that the Chinese government really will ease up on its domestic tech sector giants after taking a harsh stance toward them for much of the past year. 

I think many investors are looking for more proof that Beijing's words will translate into action. As such, it could be a good time to start looking at Chinese stocks, which are trading at heavily beaten-down levels.