Photo credit: www.cnbc.com
A monitor showcasing Alibaba Group Holding Ltd. signage on the New York Stock Exchange (NYSE) is a vivid reminder of the ongoing challenges faced by U.S.-listed Chinese companies amidst heightened regulatory scrutiny.
The big story
The increasing oversight from U.S. authorities over Chinese firms listed on American exchanges has sparked concerns regarding potential delistings, casting a shadow over the long-standing presence of Alibaba and similar companies in the U.S. market. An ambiguous remark from U.S. Treasury Secretary Scott Bessent on April 9 about the status of these stocks further fueled anxiety among investors, leading to apprehensions that significant capital could exit the markets if these firms faced forced delisting.
According to the Holding Foreign Companies Accountable Act, which was enacted in 2020, the U.S. Securities and Exchange Commission (SEC) has the authority to initiate a delisting if a company fails to comply with auditing requirements for two consecutive years. Recently confirmed SEC Chairman Paul Atkins signaled his commitment to this enforcement during a hearing, indicating a robust approach to the inspection of U.S.-listed Chinese firms.
The ripple effect of Bessent’s comments was evident, with analysts highlighting the possibility of U.S. investors being compelled to liquidate approximately $800 billion in investments in Chinese stocks, should stricter regulations be imposed. Furthermore, Chinese investors might also have to divest their U.S. financial assets, which could amount to nearly $1.67 trillion across stocks and bonds.
In a recent communication to clients, KraneShares, a significant player in the Chinese stock ETF sector, downplayed the likelihood of widespread delistings. The firm has previously adjusted its portfolio strategy to include more Hong Kong-listed shares in response to earlier concerns about delisting, a move it may continue should conditions necessitate further transitions.
Since its initial public offering in New York, Alibaba expanded its presence by listing additional shares in Hong Kong in 2019. While some counterparts like Baidu and JD.com have also sought dual listings, others such as Temu’s parent PDD Holdings have yet to follow suit. PDD has not responded to recent inquiries from CNBC regarding its listing strategy; this company moved its headquarters from China to Ireland in 2023.
A White House memo
In the broader context, the U.S. government has signaled a renewed intensity toward regulating investments in Chinese firms, as articulated in President Donald Trump’s “America First Investment Policy” memo released in late February. This guidance highlights a comprehensive review of U.S. investments in China, signaling increased scrutiny not only on public listings but also encompassing the Holding Foreign Companies Accountable Act.
Winston Ma, an adjunct professor at NYU School of Law, noted that the regulatory landscape could evolve swiftly. If action is taken promptly, regulators may consider audit compliance periods starting in April 2025, raising the prospect of accelerated delistings.
The Public Company Accounting Oversight Board has been able to examine audit records of affected Chinese companies, indicating progress in oversight, yet the SEC remains reticent, with officials commenting that no existing issuers are currently at risk of trading prohibitions.
Political momentum
Recent actions from the House Select Committee on China have put additional pressure on major investment banks, requesting them to withdraw from underwriting upcoming IPOs for Chinese companies, such as the Hong Kong debut of Contemporary Amperex Technology. While JPMorgan Chase refrained from comment, Bank of America has not yet responded to these developments.
Amidst rising tensions, Trump’s conflict with Harvard has escalated scrutiny on how U.S. universities’ endowment funds may have profited from investments in China. The House committee has referenced advocacy research demonstrating substantial investment from U.S. pension funds and academic endowments into Chinese entities.
Andrew King, Executive Director of Future Union, emphasized the urgency for the SEC and its leadership to adopt a firmer stance against longstanding discrepancies in regulatory enforcement, calling the potential delistings overdue. King noted that lack of regulatory transparency has resulted in significant scandals, undermining trust and creating barriers to foreign investment.
In response, China’s securities regulatory body is enhancing its oversight of domestic firms seeking to enter foreign markets, particularly after issues surrounding Didi’s IPO in 2021. Recent changes in regulations have resulted in fewer large Chinese companies pursuing U.S. listings, including the recent case of milk tea company Chagee.
Nevertheless, the ongoing uncertainty surrounding TikTok’s potential divestiture serves as a reminder that the anticipated delistings may not occur imminently, even as investors remain vigilant about safeguarding their portfolios.
Top TV picks on CNBC
Need to know
A shift in U.S.-China dynamics may be on the horizon. Treasury Secretary Scott Bessent shared optimistic views regarding a potential de-escalation of trade tensions between the U.S. and China. This optimism comes amid signs that China may retaliate against nations following U.S. directives aimed at isolating Beijing.
Nvidia’s CEO recently engaged with Chinese leaders. Jensen Huang’s official meetings in Beijing included discussions with Vice Premier He Lifeng, coinciding with a broader shift in public sentiment, as a recent Pew Research survey indicated a slight easing in negative perceptions of China among Americans.
Chinese local governments consider monetizing seized cryptocurrencies. Reports suggest that local authorities, facing fiscal challenges, are contemplating the sale of confiscated crypto assets, even as the country maintains a strict ban on digital currencies. Official statistics indicated a slight decrease in youth unemployment rates within China as well.
In the markets
The response from the markets reflected a positive sentiment, as both Chinese and Hong Kong stocks saw gains Wednesday, buoyed by optimism around potential thawing in U.S.-China trade relations. The CSI 300 index in mainland China experienced a modest increase of 0.15%, while Hong Kong’s Hang Seng Index surged by 2.16% in early trading.
Since the beginning of the year, the CSI 300 has recorded a decline of 3.7%, whereas the Hang Seng Index has posted a sizable gain of 9.67%. Meanwhile, the yield for benchmark ten-year government bonds in China slightly increased to 1.660%, while the offshore Chinese yuan held steady against the dollar.
Coming up
April 27 – 30: Meeting of China’s parliament standing committee to discuss a private sector support law.
April 30: Release of the official Purchasing Managers’ Index for April and the Caixin Manufacturing PMI.
May 1 – 5: Observance of China’s Labor Day holiday.
Source
www.cnbc.com