Author: Abby Copeland, Graphics: Nina Tagliabue
The BRB Bottomline
Recently, negative news relating to Chinese stocks listed on U.S. exchanges has found its way into headlines worldwide. From the Luckin Coffee fiasco to the delisting of Didi, Chinese stocks have created polarization across the investing community. While some investors are going big on Chinese stocks, others remain wary. In this article, investing columnist Abby Copeland investigates the complicated nature of Chinese stocks listed on U.S. exchanges and what the future may hold for them.
Many appealing elements attract investors to China. A rising middle-class population, revenge spending associated with the Covid-19 pandemic, and historically steady economic growth are all conventional positives that encourage investors to buy Chinese stocks. However, despite the seemingly positive elements of Chinese stocks, they are often also negatively affected by external factors such as Sino-American relations and domestic regulation issues. This article explores the challenged state of Chinese stocks listed on U.S. exchanges and what investors can expect to see for the future of Chinese stocks.
Catalysts for the Decline of Chinese Stocks Listed on U.S. Exchanges
Several factors have contributed to the decline of Chinese stocks listed on U.S. exchanges. In 2018, the Trump administration began imposing tariffs on Chinese goods to combat a trade deficit between the United States and China, beginning the U.S.-China Trade War. According to a study on the U.S.-China Trade War from The Centre for Economic Policy Research, trade war imposed tariffs and disruptions to global value chain linkages are all factors that have negatively influenced U.S. listed Chinese stocks. The trade war and several other mutual points of contempt have ushered in a new era of tense U.S.-China relations. In addition, the Covid-19 pandemic has not only added to already poor U.S.-China relations but has also negatively impacted global markets and, as a result, U.S.-listed Chinese stocks.
The Luckin Coffee Fiasco and U.S. Crackdown of Chinese Stocks
One of the biggest factors contributing to the downfall of Chinese stocks listed on U.S. exchanges is the Luckin Coffee fiasco. Luckin Coffee, a Chinese coffee company and chain, quickly became an investor favorite after surpassing the amount of Starbucks stores in China within three years of its founding. However, fraud reports and falsified financial statements quickly affected its initial success in early 2020. Many believe this prompted the U.S. government to pass the Holding Foreign Companies Accountable Act (HFCAA) in 2020. The Act allows the Public Company Accounting Oversight Board (PCAOB) under the Securities and Exchange Commission (SEC) to delist any publicly-traded company which does not provide audited financial information for more than three consecutive years and requires all foreign companies to state whether or not they are controlled or owned by their respective governments. According to an article from Reuters, as many as 200 Chinese companies are non-compliant with these conditions and could be shortly delisted from U.S. exchange markets.
The CCP’s Tech Crackdown
In response to the U.S. crackdown of Chinese stocks, the Chinese government has introduced a series of regulations primarily aimed at removing Chinese domestic stocks from U.S. exchanges. This crackdown is mostly focused on tech stocks. Notable examples include the suspended IPO of Jack Ma’s Ant Group. Ant Group was set to have a record-breaking $37 billion IPO listing on Hong Kong and Shanghai stock exchanges. However, quickly after the announcement of an IPO, Chinese regulators canceled the listing.
Although the Ant Group crackdown did not occur on U.S. exchanges, it still expresses the will of the Chinese government to use stocks as a geopolitical tool and to assert domination. Most recently, Didi, a popular ride-hailing app, has announced their delisting from the New York Stock Exchange (NYSE) only months after their initial public offering. An article from The Diplomat argues that Didi was the latest victim of Beijing’s tech crackdown. After Didi went against the Chinese government and moved forward with their NYSE listed IPO, the Cyberspace Administration of China started inquiries into Didi’s alleged cybersecurity violations. According to an article from the New York Times, David Webb, a former banker and longtime investor in Hong Kong, quotes on the Chinese tech crackdown,“‘It is all part of a mainland government plan to ‘bring them home’ and disengage from U.S. regulation.”’
Current State of Chinese Stocks
Many U.S.-listed Chinese stocks are extremely volatile. Chinese stocks, like many American Depository Recipients (ADR) are often risky to own without careful oversight and research. The current risky state of U.S. exchange listed Chinese stocks reflects in part the regulatory war between the U.S. and China. Relations are at an unprecedented low-point, and inexperienced investors can easily find themself caught between a geopolitical power war.
While the United States and China will continue to emphasize their respective domestic economies, investors remain the biggest losers in this conflict. Some investors such as Forbes’ Cathie Wood, who recently sold all Chinese stocks that her firm, Ark Investment, previously held, believes Chinese stocks incur too much risk. However, others, including investment management corporations like BlackRock, believe the dip may be a buying opportunity. Despite the highly complex nature of Chinese stocks, if investors still believe they are ripe for investment, it is best to reduce investment risk and purchase Chinese stocks on Chinese or Hong Kong stock exchanges as opposed to an ADR.
Take-Home Points
- There are several factors that have contributed to the downfall of Chinese stocks listed on U.S. exchanges.
- One of the biggest catalysts contributing to the downfall of Chinese stocks listed on U.S. exchanges is the Luckin Coffee fiasco.
- Reports of fraud relating to Luckin Coffee led to the passing of the Holding Foreign Companies Accountable Act (HFCAA). This allows the Public Company Accounting Oversight Board (PCAOB) under the Securities and Exchange Commission (SEC) to delist any publicly-traded company which does not provide audited financial information and requires all foreign companies to state whether or not they are controlled or owned by their respective governments.
- The Chinese government has also introduced a series of regulations aimed at removing domestic stocks from U.S. exchanges.
- Chinese stocks remain volatile, and if investors still wish to purchase them, it is best to do it directly on a Chinese or Hong Kong stock exchange.
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