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Chinese stocks plummeting further

Dan Ashmore, CFA

The SEC last week identified five American depositary receipts (ADRs) of Chinese companies that fail to comply with Holding Foreign Companies Accountable Act. ADRs are shares of non-US firms which are traded in the US.

Implications

This has caused fear that the companies will be delisted, as the act permits the SEC to ban trading, or delist companies, if three consecutive years of audits are not satisfactory to regulators. The companies in question are Yum China, BeiGene, ZaiLab, ACM Research and HUTCHMED. While that is the extent of the list, a sell-off was triggered in most Chinese stocks, as investors feared further action. The five companies in question were only on the list because they had recently filed their annual reports with the SEC and there is no reason to believe the list won’t grow once other Chinese companies struggle to comply with the audit requirements.  

Other Risk Factors

That is far from the only concern investors have around China, however. With Russia reaching out to China for military assistance, there is concern about the actions Beijing may take going forward. US National Security Advisor Jake Sullivan even told CNN that the US believed China was aware ahead of time that Putin was “planning something”, although conceded that Beijing “may not have understood the full extent of it”.

With investors cognisant of the mayhem in Russian markets that the invasion and subsequent sanctions have caused, fear has rippled through Chinese stocks. This is reinforced by the US outlining that there “will absolutely be consequences for large-scale sanctions evasion efforts or support to Russia to backfill them”. Yet another factor thrown in the mix is the surging COVID cases, with a new lockdown announced in Shenzhen – a city of 23 million people. Production delays are expected as a result, with the city home to numerous tech companies’ headquarters. In the US, Apple shares are down 2.5%, as the lockdown is expected to impact suppliers.

Bears in Driving Seat

With the macro climate worldwide already competing with spiralling inflation while poising itself for rate hikes this week, even aside from the Russian invasion, investors have been hesitant. Right now, buyers are evaporating for Chinese stocks given the additional risks that investing in the country poses, preferring to lessen exposure and not bear the brunt of any further possible drawdowns.

At time of writing, e-commerce giant Alibaba is trading at $80.50, down nearly 20% from Thursday, a $435 billion loss in value highlighting the extent of the movements. With the Fed expected to hike this week and the ten-year Treasury yield now back above 2%, the bears are out to play to start the week.