Why Shares of New Oriental Education & Technology Group, TAL Education Group, and KE Holdings Fell Today

What happened

Chinese stocks fell today on a number of negative headlines for the sector, including tighter regulations and weaker economic data. Shares of the private-education company New Oriental Education & Technology Group (EDU 4.54%) fell roughly 10% today; shares of the online-tutoring company TAL Education Group (TAL 0.45%) fell 21.6%; and shares of the real estate company KE Holdings (BEKE 7.39%) ended the day down about 9.5%.

So what

On Friday, the U.S. Department Of Commerce's Bureau of Industry and Security (BIS) introduced a series of new regulations on exports, specifically aimed at the sale of semiconductor chips and related hardware to China. The BIS will require companies that wish to sell this kind of hardware to China to apply for a license.

Furthermore, other foreign companies that use American-made tools to create chips they sell to China will also need to apply for a license. The BIS said the measures are part of ongoing efforts to protect national security and interests abroad.

"As I told Congress in July, my north star at BIS is to ensure that we are appropriately doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People's Republic of China's military, intelligence, and security services," Alan Estevez, the undersecretary of BIS, said in a statement. The move seemed to ratchet up tensions between the U.S. and China, which responded to the new regulations over the weekend.

"The U.S. has been abusing export control measures to wantonly block and hobble Chinese enterprises," said Mao Ning, a spokesperson of China's Ministry of Foreign Affairs, according to CNBC.

In other news, the U.S. Securities and Exchange Commission (SEC) named New Oriental Education & Technology Group as a possible Chinese stock that could be delisted under the Holding Foreign Companies Accountable Act (HFCAA). The HFCAA states that if a foreign company doesn't have its working financial statements audited by U.S. regulators for three years in a row, it can't trade on U.S. stock exchanges.

The issue has been problematic for Chinese companies because the Chinese government previously hasn't allowed U.S. regulators to conduct audits due to privacy and national-security concerns. U.S. and Chinese financial regulators struck a preliminary agreement earlier this year that would allow U.S. regulators to inspect auditors in China and Hong Kong. It marked a huge step forward, but U.S. regulators still seem cautious about celebrating just yet.

The naming of New Oriental by the SEC today likely renewed fears among investors about Chinese stocks being delisted. Additionally, weak consumer spending in China amid a continuation of lockdowns due to COVID-19 also seemed to be impacting the sector.

What now

Part of the risk in owning Chinese stocks on U.S. exchanges is just how many external factors can significantly impact investor sentiment, including U.S. regulation, China's domestic regulation, and escalating U.S.-China relations. There are also multiple economies to keep an eye on. Today, all of these factors came into play.

A lot of these companies have huge potential, given the massive Chinese market, but you really need to understand how all of these external factors impact each stock. This is why even more due diligence than normal is required if you're going to invest in the sector.