Chinese and American flags outside the building of an American company in Beijing, China January 21, 2021.
Tingshu Wang | Reuterss
A new ruling by the Securities and Exchange Commission requiring foreign companies to file government affiliations and influence is a headache for Chinese investors. It is one of several problems that arise between US and China investors.
Chinese stocks have been in correction mode for several weeks, but the new rule is tightening the price, especially those quoted in the US
US-Listed China Stocks This Week:
GSX down 57%
Tencent Music down 36%
Vipshop down 34%
Baidu down 22%
Bilibili down 12%
Trip.com down 11%
Alibaba down 6%
While the new SEC rules apply to all overseas listed companies, they specifically target China, which has repeatedly violated U.S. regulators’ efforts to oversee audits of Chinese companies.
This week the SEC passed preliminary final amendments to implement the Foreign Holding Company Accountability Act. Under the new rules, companies must submit documents to prove that they are not owned or controlled by a government agency in a foreign jurisdiction.
Chinese companies are also required to designate any board member who is a Chinese Communist Party official.
If companies fail to comply after three years, US regulators could delist the companies.
Jay Clayton, who headed the SEC for the past four years and recently returned to private practice, said the SEC’s move this week to begin implementing the new law may have woken up the trading community.
“Congress has now decided that US-listed Chinese companies should no longer have an effective exemption,” Clayton wrote to me. “The audits of these companies must comply with US law”.
Many other problems for Chinese stock investors
It’s been a tough month for Chinese investors.
China’s CSI-300, the top 300 stocks in China, was one of the top performing indices in the world for the first six weeks of 2021. It rose 15%, far outperforming the US, Europe, and almost all of Asia.
Since then, in the immediate aftermath of the Chinese New Year, it has been going down as the index is now down 3% for the year.
Brendan Ahern, who runs Kraneshares China Internet ETF (KWEB), a fund that primarily holds US-listed Chinese stocks, says China’s tech sector is facing many of the same valuation concerns that US tech stocks are facing.
“Growth names have generally suffered from cyclical / value rotation, and that includes China’s growth names,” Ahern said.
Anyone Puking China Stocks?
Ahern noted that huge block deals have been going on in many Chinese names lately, including Tencent Music, Vipshop, and Baidu. “There is some speculation that this is a forced liquidation by a fund,” he said.
Other market watchers also took note of the enormous trade. Tencent Music, for example, normally trades around 17 million shares a day, but it was approaching 300 million at the close of trading today.
“The only logical explanation for this type of size is that there is a real fear of delisting or political issues between the US and China,” said Steve Sosnick of Interactve Brokers. “Someone pukes, someone says ‘get me out’, but it’s not clear why.”
Sosnick noted that Credit Suisse, Morgan Stanley, Baillie Gifford and Nomura are among Tencent Music’s largest shareholders.
Ahern’s Kraneshares Internet ETF has seen stock trading north of 5 million shares per day for the past two days, which is twice the normal trading volume, and is trading 10 million shares today.
China’s regulators aren’t happy either
The pressure isn’t just coming from US regulators. In November, Chinese regulators stunned investors there by closing the Ant Group IPO at the last minute.
Since then, Chinese officials have repeatedly raised concerns about excessive stock prices and excessive leverage in the system.
Chinese regulators recently fined some of the biggest tech giants, including social media company Tencent Holdings, search engine Baidu, and hail company Didi Chuxing, for violating China’s antimonopoly laws, claiming it was protecting consumer interests.
Backlash by China against clothing companies
Some traders also noted that the US-China war of words spilled over to clothing brands this week, possibly adding to the bad blood as well.
Adidas, Nike and H&M all fell during the week when key players on China’s social media called for a boycott of companies over statements they made months ago about forced labor in the Uyghur autonomous region.
“The Chinese government is ready to say to companies and governments around the world: ‘You urgently need access to our markets and if you do not behave in an unacceptable manner, we will punish you'”, Ian Bremmer, President of Eurasia Group, said on CNBC.
Will China Open Its Books?
All in all, this is a very difficult moment for US investors in Chinese companies.
Many Chinese observers hope that the SEC’s latest move to enforce the new US law will ultimately be resolved.
“I am optimistic that there will be an agreement as it is of interest to both sides to resolve this issue,” said Andy Rothman of Matthews Asia on CNBC.
But getting to that point won’t be easy. Chinese regulators have refused to provide data, largely due to sensitivity to state-owned companies, mainly large banks, energy, materials and industrial companies.
“You don’t want to open these books to US government agencies because you would know what subsidies these companies are receiving from the Chinese government,” Ahern said, noting that while most Chinese technology companies are privately owned, the level of government involvement does is also not very clear.