Chinese stocks that trade in the U.S. have always been a double-edged sword for investors, but Americans now face a wicked blade as years of buildup leads to an inevitable end.
The decline has left many American investors holding on to Chinese stocks with hopes that they will rebound, or as potential losses to offset other taxable gains if they are sold in 2021. But with a new U.S. law requiring more disclosures from the auditors of Chinese companies, combined with pressure from Chinese regulators on companies with a lot of data to list in China instead, it appears the market for Chinese stocks in the U.S. has blown up, and more pain may be on the way.
Last month, the Securities and Exchange Commission finalized the rules that will require foreign companies give the PCAOB the documents, or so called work books, used in overseas financial audits. In addition, companies must provide proof that they are not controlled by their governments. Many Chinese companies have board members with ties to the Chinese Communist Party or to the Chinese military.
“If they are this paranoid about sensitive info falling into the hands of Americans because the companies are listed in the U.S., it seems unlikely China will let the PCAOB into the country to inspect audits,” Fried said. “And that means the endgame under the HFCAA will be the forced delisting of these companies, even if China does not force them to come home.”
But Alibaba has already seemingly prepared for possibly delisting from U.S. markets. In November 2019, Alibaba shares began trading on the Hong Kong stock exchange as a secondary listing, where it raised an additional $11 billion in capital. That was five years after its initial IPO in the U.S.For investors holding the big-cap Chinese stocks, a move to the Hong Kong stock exchange is the most straightforward and the best possible outcome. That would include some of the biggest U.S.
Rothman said China is an enormous market that is impossible to ignore, but that it is a complicated and difficult market to understand.
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tpoletti MOASS
tpoletti Good call. Things could only get worse.
tpoletti I'm done. Their government is killing their market.
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