China is cracking down on stocks that trade on US stock exchanges. This is what it means

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Chinese President Xi Jinping attends the WEF virtual event of the Davos Agenda World Economic Forum and delivers a special speech via video link in Beijing, capital of China, Jan.25, 2021.

Li Xueren | Xinhua News Agency | Getty Images

China’s most powerful companies – including Didi, Alibaba and Tencent – are suddenly coming under scrutiny as the country pledges to crack down on domestic companies listed on U.S. exchanges. The move could upend a $ 2 trillion market valued by some of America’s biggest investors.

Beijing is stepping up its watch over the flood of Chinese listings in the United States, which are largely tech companies. The State Council said in a statement on Tuesday that the rules of the “foreign listing system for domestic companies” would be updated, while also tightening restrictions on cross-border data flows and security. .

The crackdown on technology is not a new trend. But because the nation has the capacity to act quickly, any action could wreak havoc in major Wall Street neighborhoods. Market analysts say this could not only threaten ongoing IPOs, but also put pressure on the popular Chinese ADR market.

Weigh the risks of owning ADRs

There were at least 248 Chinese companies listed on three major U.S. exchanges with a total market capitalization of $ 2.1 trillion, according to the U.S.-China Economic and Security Review Commission. There are eight Chinese state-owned enterprises nationally listed in the United States.

the Invesco Golden Dragon China ETF (PGJ), which tracks US-listed Chinese stocks comprised of ADRs of companies headquartered and incorporated in mainland China, lost a third of its value from its February peak in a context of increased regulatory pressure. ADR stands for US Certificate of Deposit and they are effectively a way for US investors to buy stakes in foreign companies.

US investors will need to weigh the risks of owning ADRs at a time when tensions between Beijing and Washington remain high while all global investors will need to balance the lure of China’s large addressable market with the possibility that officials may reshape. the company’s outlook to race a pen via the imposition of regulatory restrictions, ”BCA Research chief strategist Peter Berezin said in a note on Wednesday.

The Didi carpooling app has become the latest victim of the Chinese authorities’ crackdown. The stock fell nearly 20% on Tuesday after Beijing announced a cybersecurity investigation, suspending new user registrations.

Republican Senator Marco Rubio said The Financial Times in a statement Wednesday that it was “reckless and irresponsible” to allow Didi, an “irresponsible Chinese company”, to sell shares on the New York Stock Exchange.

Meanwhile, Nasdaq-listed Weibo is now considering going private after its operator Tencent reportedly underwent a regulatory investigation, particularly in its fintech business. Beijing has sought to subdue Chinese billionaire Jack Ma’s Alibaba by launching a series of investigations since last year.

“You must be able to understand the political and national security dynamics that go into an investment, an agreement, your engagement with a Chinese company, your investment with the Chinese company, your interest in doing cross-border business,” manages Longview Global . said director and senior policy analyst Dewardric McNeal. “It’s not neat and neat and just the numbers.”

Some of these big Chinese companies are darlings on Wall Street. For years, Alibaba has been in the top five stocks held by hedge funds, along with Facebook, Microsoft, Amazon, Alphabet, according to Goldman Sachs.

Billionaire investor Leon Cooperman recently said Baidu and Alibaba were among his biggest holdings as he pitched stock picking as a way to succeed in the second half of the year.

IPOs in danger

Chinese regulators are considering a rule change that would allow them to prevent a domestic company from listing in the United States even if the unit selling shares is incorporated outside of China, Bloomberg News reported citing people familiar with the matter.

The move could be a blow to Chinese companies that have claimed their listing in New York in recent years. In 2020, 30 China-based IPOs in the US raised the most capital since 2014, according to data from Renaissance Capital.

New registrations could be fewer and slower in the United States due to government crackdown, said Donald Straszheim, senior general manager of China research at Evercore ISI Group.

“Beijing [is] not trying to stop all registrations in the United States. Trade relations between the United States and China are always better than not, ”Straszheim said in a note. “Beijing [Is] trying to add a layer of protection against foreign corporate compliance. “

At the end of April, around 60 Chinese companies were still planning to go public in the United States this year, according to the New York Stock Exchange.

– CNBC’s Hannah Miao, Evelyn Cheng and Michael Bloom contributed reporting.

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