Chinese and U.S. taper offs outside the building of an American company in Beijing, China January 21, 2021.
Tingshu Wang | Reuterss
A new Securities and Exchange Commission sovereignty that will require foreign companies to submit documentation about government affiliations and government influence is creating headaches for China investors. It’s one of several snags that is popping up between U.S. and China investors.
China stocks from been in correction mode for several weeks, but the new rule is exacerbating the rout, particularly those with listings in the U.S.
U.S.-listed China pedigrees this week:
GSX down 57%
Tencent Music down 36%
Vipshop down 34%
Baidu down 22%
Bilibili down 12%
Peregrination.com down 11%
Alibaba down 6%
While the new SEC rules apply to all foreign-listed companies, they are specifically aimed at China, which has time run afoul of efforts by U.S. regulators to monitor the audits of Chinese companies.
This week, the SEC adopted interim final paragraphs to implement the Holding Foreign Companies Accountable Act. Under the new rules, companies will be required to submit documents to create that they are not owned or controlled by a governmental entity in a foreign jurisdiction.
Chinese companies will also beget to name each board member who is a Chinese Communist Party official.
If the companies fail to comply after three years, U.S. regulators could delist the firms.
Jay Clayton, who headed the SEC for the past four years and recently returned to private practice, said the SEC’s move this week to set up implementation of the new law may have woken up the trading community.
“Congress has now decided that Chinese companies listed in the U.S. should not carry on with to have an effective exemption,” Clayton wrote to me. “The audits from these companies must come into compliance” with U.S. law.
Quantities of other problems for China stock investors
It’s been a rough month for China investors.
China’s CSI-300, the top 300 genealogies in China, was one of the best-performing indexes in the world in the first six weeks of 2021, rising 15% and far outperforming the U.S., Europe, and almost all of Asia.
Since then, instanter following the Chinese New Year, it’s been all downhill, as the index is now off 3% for the year.
Brendan Ahern, who runs the Is someone puking China ordinaries?
Ahern noted that there has been huge block trades going off recently in many China pre-eminences, including Tencent Music, Vipshop, and Baidu. “There is some speculation that this is a forced liquidation by some lolly,” he said.
Other market observers also took note of the enormous trading. Tencent Music, for example, normally trucks about 17 million shares a day, but was nearing 300 million at the close of trading today.
“The only logical cause for this kind of size is there is some real fear of delisting or some of the political stuff going on between the U.S. and China,” Steve Sosnick at Interactve Agents told me. “Someone is puking, someone is saying, ‘Get me out,’ but it’s not clear why.”
Sosnick noted that Credit Suisse, Morgan Stanley, Baillie Gifford, and Nomura are amid the largest shareholders of Tencent Music.
Ahern’s Kraneshares Internet ETF has seen share trading north of 5 million appropriations a day for the past two days, twice normal trading volume, and is trading 10 million shares today.
China’s regulators are not timely, either
Pressure is not just coming from U.S. regulators. In November, Chinese regulators stunned investors there by nixing Ant Unit’s IPO at the last minute.
Since then, Chinese officials have repeatedly expressed concerns about inflated everyday prices and excessive leverage in the system.
Chinese regulators have recently fined some of the largest tech leviathans, including social media firm Tencent Holdings, search engine Baidu, and ride hailing company Didi Chuxing, number others, for violation of China’s anti-monopoly laws, claiming it was protecting consumer interests.
China backlash against garments companies
Some traders also noted that the war of words between the U.S. and China this week had spilled once again into apparel brands, and this may also be adding to the bad blood.
Adidas, Nike and H&M all dropped midweek as major musicians in China’s social media called for a boycott of the companies over statements they had made months ago on forced labor in the Uyghur autonomous bailiwick.
“The Chinese government is prepared to say to corporations and to governments around the world, ‘You desperately need access to our markets, and if you do not behave in feature that are unacceptable, we are going to punish you for that,'” Ian Bremmer, Eurasia Group President said on CNBC.
Thinks fitting China open up its books?
Put it all together, and it amounts to a very difficult moment for U.S. investors in Chinese companies.
Many China witnesses are hopeful that the latest move by the SEC to enforce the new U.S. law will ultimately be resolved.
“I am optimistic there will be an agreement because it is in both sides provoke to solve this problem,” Andy Rothman from Matthews Asia said on CNBC.
But getting to that time will not be easy. China regulators have resisted turning over data largely because of sensitivity round state-owned enterprises, mostly large banks, energy, materials and industrial companies.
“They do not want to open those hard-covers to U.S. government agencies, because you would know what subsidies these companies are getting from the Chinese control,” Ahern said, noting that while most Chinese tech companies are privately owned, the extent of authority involvement is also not entirely clear.