Chinese Tech Stocks Hammered as US Law Threatens to Delist Firms from American Exchanges

Last Updated on May 31, 2021

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Most important dual-listed Chinese tech shares trade in Hong Kong. Their shares fell abruptly on Thursday, 25 March, as Washington has pushed ahead with new laws on Chinese firms. They must now follow American auditing standards if they want to be listed on US exchanges. This move has lead to the delisting of major companies like Alibaba from US markets.

This move by the US Securities and Exchange Commission (SEC) added to the unparalleled regulatory shutdown in China on domestic technology companies, quoting anxieties that they have built market power that smothers competition.

Former President Donald Trump signed this “Holding Foreign Companies Accountable Act” in December. This act is meant to remove Chinese companies from US exchangers if they cannot act in accordance with the American auditing standards for three consecutive years.

Investors have been preparing for this for months as some turn their eyes to the company’s secondary listings in Hong Kong. More than a hundred companies still do not have a second listing, and analysts say these companies could go private, possibly at lower valuations.

So the way this legislation works is that Chinese companies and their auditors would have three years to comply with US regulations before their shares could potentially be removed from the US exchanges. Now the reason for this legislation in the first place is that China typically does not allow American regulators the type of access to its company’s books that is required here, leaving investors potentially somewhere in the dark.

China has pushed back against this new legislation. The Chinese government says it is against the politicization of securities regulation and says it is discriminatory against foreign firms. They are not only under pressure but also concerned about stricter regulations at home. Bejing has reigned in the power of technology Hulks and began new rules in areas from financial technology to e-commerce.

More than 250 Chinese firms are listed on the American exchanges, including massive companies like Alibaba, and those firms are worth more than two trillion dollars.  American regulators are reportedly working on another arrangement that would allow Chinese regulators to comply with the American regulations without violating Chinese law themselves.

We have also heard some criticism from the US exchanges themselves, such as the New York Stock Exchange and the NASDAQ, which would suffer if Chinese firms were forced out of those exchanges, given the trading volume and the listing fees they receive. In fact, the heads of both of those exchanges have criticized the legislation. The signing of this bill into law by former president Trump is just one of the many thorny issues between Beijing and the new Biden administration.

Alibaba Group slipped down more than 4% at 1:04 pm today while Baidu was down over 8%. NetEase tanked over 3%, and JG.com was nearly 4% down.

At first, many investors thought that the Biden administration and the US would be more amicable towards China and that things would be easier, but this event shows that it will be tough.

There are reports that Pony Ma, the Tencent founder, met with Chinese antitrust officials this month. Tencent is only listed in Hong Kong – according to the Hong Kong Times, its shares were more than 2% down today at about 1:17 pm.

This is not likely to be the end of the negotiations but rather the beginning. There is certainly more to come in this saga.