What happened
Many Chinese stocks rose today on positive regulatory news, but also were affected as COVID-19 cases continued to spread in the country and by some geopolitical concerns between China and Taiwan.
Shares of the large e-commerce and tech company Alibaba (BABA 1.83%) traded as much as 5% higher today before giving up some of those gains and only trading about 2.2% higher as of 1 p.m. ET today. Shares of another e-commerce giant, JD.com (JD 1.67%), traded roughly 3% higher, and shares of Burning Rock Biotech (BNR -6.28%) were up nearly 24%.
So what
Recently, U.S. and Chinese financial regulators struck a preliminary agreement to allow regulators to audit the working financial statements of Chinese companies trading on U.S. exchanges, potentially ending a long-standing dispute on the matter.
Image source: Getty Images.
Since the early 2000s, the Chinese government has not allowed U.S. regulators to conduct these audits, citing national security and data concerns. But in 2020, Congress passed the Holding Foreign Companies Accountable Act, which stated that if a foreign-listed company didn't submit to a formal audit for three straight years, it would be delisted. This year, the Securities and Exchange Commission has named hundreds of Chinese companies that face potential delisting.
This drove Chinese financial regulators to the bargaining table, and now a preliminary deal has been struck that will send the Public Company Accounting Oversight Board (PCAOB), an organization created by Congress to audit publicly traded companies, to Hong Kong in September to begin on-the-ground audits.
A Reuters report today said that Alibaba and JD.com are expected to be among the first audits in September, which brings them one step closer to no longer facing a delisting threat.
However, the positive regulatory news was met with some other events that cut into some of the gains today. COVID-19 cases continue to spread in China, leading to some concerns about more lockdowns ahead. Lockdowns instituted earlier this year hurt economic growth, and recent data showed that activity at factories in China is still slowing.
Additionally, tensions between China and Taiwan grew after Chinese drones were seen flying near the coast. In response, Taiwan fired warning shots at the drones. Taiwan's government also said that it would not hesitate to defend itself against any kind of Chinese attack in its territory, a statement that has rattled investors.
In other news, Burning Rock Biotech today reported a net loss of $0.37 per share in the second quarter of the year on total revenue of roughly $19.5 million, both numbers that missed analyst estimates. However, the company managed to maintain its full-year revenue guidance of $92.6 million, despite the difficult conditions brought on by spreading COVID cases.
Now what
It's a little bit of a mixed bag today for Chinese stocks. The deal between U.S. and Chinese regulators over the auditing dispute is big but has been known about for a few days now.
Meanwhile, rising tensions between China and Taiwan are not good for markets, and more COVID cases is not good news either because it raises the prospect of more lockdowns, which would further hurt economic growth in the country.
I think Alibaba and JD.com are solid long-term bets right now. It was good to see Burning Rock retain its guidance, but the impact of past COVID-related restrictions is still weighing on the business and makes the stock still risky, especially if more lockdowns happen.
