What happened
Shares of many Chinese stocks that trade on U.S. stock exchanges struggled this week after the sector faced a number of regulatory and economic developments.
For the week, shares of the Chinese agtech company Pinduoduo (PDD -0.37%) had slumped nearly 13% as of market close Thursday, according to data provided by S&P Global Market Intelligence.
Meanwhile, shares of the Chinese real estate platform KE Holdings (BEKE 0.88%) traded more than 20% lower, and shares of the artificial intelligence company Baidu (BIDU 0.98%) were down roughly 11%.
So what
Over the last weekend, investors digested a set of sweeping new rules aimed at hobbling China's military capabilities, ratcheting up tensions between China and the U.S.
Image source: Getty Images.
The U.S. Department of Commerce's Bureau of Industry and Security imposed new export controls requiring U.S. companies seeking to sell select semiconductor chips or other hardware to China to apply for a license. Furthermore, foreign companies seeking to do this that use tools made in the U.S. to manufacture certain chips would also have to apply for licenses.
"The PRC (People's Republic of China) has poured resources into developing supercomputing capabilities and seeks to become a world leader in artificial intelligence by 2030. It is using these capabilities to monitor, track, and surveil their own citizens, and fuel its military modernization," Thea D. Rozman Kendler, assistant secretary of commerce for export administration, said in a statement.
She added: "Our actions will protect U.S. national security and foreign policy interests while also sending a clear message that U.S. technological leadership is about values as well as innovation."
In other news, the U.S. Securities and Exchange Commission (SEC) continued to name Chinese stocks trading on U.S. exchanges that could eventually get delisted under the Holding Foreign Companies Accountable Act (HFCAA). The law states that if foreign companies aren't properly audited by U.S. financial regulators for three straight years, they can no longer trade on U.S. stock exchanges.
The issue has been ongoing specifically for Chinese companies because the Chinese government has frequently prohibited these audits, citing national security and data privacy concerns.
U.S. and Chinese financial regulators seemed to be making progress, having made a preliminary agreement in September for U.S. auditors to conduct joint audits of companies in Hong Kong and China. But the SEC continuing to call out Chinese stocks at risk of being delisted may have renewed fears on this matter.
Finally, investors continue to worry about the spread of COVID-19 in the country and lockdowns, which have taken a toll on the economy and its growth prospects.
Now what
This week's events show just how much regulation, both here and in China, can impact Chinese stocks.
I think all three of these names have great potential. KE Holdings is the leading online and in-person real estate brokerage in China. Baidu runs the country's leading search engine (think Google) and is in the process of rolling out driverless taxis. And Pinduoduo allows Chinese consumers to purchase fresh produce from farmers through an online platform.
When you think about China's population, these three tech companies have massive opportunities. But before you invest, you need to do a lot of due diligence on how much regulation could impact their business models.
