John Tomac created the illustration.
Size of the text
For months, the enormous “warning” sign for Chinese stock investors has been blinking. It’s about to turn into a flashing warning sign. Individual investors who own or are considering purchasing individual shares of Chinese stocks listed on the New York Stock Exchange should be aware of this caution. Barron’s has been writing on the obstacles that Chinese businesses face on a variety of fronts: While tensions between the United States and China intensify, Beijing has increased regulatory inspection of its major technology businesses, resulting in investment restrictions and regulations that have further market repercussions.
Yes, there is a compelling rationale for investing in China, particularly in the long run. China’s rapid economic growth is enticing to many people, and it has resulted in a growing middle class, which has allowed many new sectors to flourish. Furthermore, many of China’s homegrown technology companies benefit from government funding and tensions between the US and China. However, as Barron’s pointed out earlier this month, the best way to navigate this terrain is to hire a tour guide in the shape of a mutual fund or exchange-traded fund management who can handle the increasing complexities. Every week, that case grows stronger. Individual shares of Chinese corporations registered in the United States, whether traded over the counter (rather than on a major exchange) or as American Depositary Receipts (ADRs), could become a risky proposition in the coming years. Institutional investors with the option of buying shares on a Hong Kong or mainland China stock exchange are well on their way to doing so, putting pressure on U.S.-listed stocks and perhaps causing liquidity issues. The ADR-heavy ADR-heavy ADR-heavy ADR-
Golden Dragon Invesco
In the last three months, the exchange-traded fund (PGJ) has lost 13% of its value. The iShares MSCI China (MCHI), which includes Hong Kong-listed stocks, is down 4%, while the iShares MSCI China A-shares (CNYA), which focuses on Chinese-listed firms, is up 7%. The latest cloud lurking over U.S.-listed Chinese companies is uncertainty about how US regulators will implement last year’s Holding Foreign Companies Accountable Act, which requires foreign companies to follow US auditing standards in order to trade on US exchanges. Chinese corporations have long been unable to provide the information required to meet with US auditing requirements due to Chinese government restrictions. The path to enforcement is well on; the public comment period for a proposal from the Public Company Accounting Oversight Board (PCAOB) closes this week, and policy observers anticipate the release of a rule soon. A spokesperson for the PCAOB declined to comment. The Securities and Exchange Commission will be able to enforce the law thanks to the rule. The current compliance deadline is three years; however, the Senate passed a bill last month that would shorten the deadline to just two years—yet another sign of bipartisan support for China policies. Despite the eagerness of policymakers, policy analysts notice a slew of unanswered questions. With 248 Chinese companies listed on US exchanges with a total market value of more than $2 trillion, delisting may be a complicated and painful process. “If a delisting is imminent, the stock price will plummet, and those in control of the company will be able to buy out public investors for a bargain, go private, and relist in Asia at a much higher valuation, making a ton of money—at the expense of Americans,” says Jesse Fried, a Harvard Law School professor who has been researching regulation of Chinese firms trading in the US. There’s also no precedent for the type of widespread delisting that may occur in the worst-case scenario—a consideration that could help the two countries reach an elusive agreement. “Despite the ongoing, heightened tensions between the United States and China, this could be the final salvo in bringing both sides back to the table to work out a deal where both sides have just enough access to audit personnel and work papers to avoid the nuclear option and the PCAOB can meet its core obligations under the Sarbanes-Oxley Act,” says Shas Das, counsel at King & Spalding. He adds that previous conversations resulted in some cooperation and access to audit work papers, but not always. Investors would be foolish to wait to see if a deal is reached, especially as tensions between the US and China continue to rise. The Senate passed a bill on Thursday banning imported products from China’s Xinjiang region, citing suspicions of forced labor, while the US has been adding Chinese firms to a blacklist, effectively blocking them from receiving US investment. When widely held, investors received a terrible peek of the chaos these policies can cause.
China Mobile is a Chinese mobile phone company.
The New York Stock Exchange delisted it in January, after President Donald Trump’s executive order prohibiting investment in companies with ties to China’s military. Many institutional investors have been able to convert into Hong Kong-listed shares, but many individual investors have been trapped in limbo—many consumers are still unable to sell their shares through their present broker, and some are being advised to seek out international brokers. Others have fallen across roadblocks and are at a loss as they don’t know who to contact for help. The Securities and Exchange Commission did not reply to a request for comment.
Subscribe to our newsletter Review & Sneak Peek Every weekday evening, we summarize the day’s most important market news and explain what’s likely to matter the next day.
Though authorities may find a way to reach a settlement or assist smaller investors, it is preferable to avoid getting into a potentially difficult situation. Andy Kapyrin, co-head of investments at RegentAtlantic, which manages $5.5 billion in assets, says it puts people in a Kafka position where they can’t move forward. “There is a risk for ordinary people who own Chinese ADRs if they don’t keep up with how this legislation evolves: they could end up with a delisted ADR that is difficult to trade.” For his clients’ China allocation, Kapyrin uses an ETF. Many significant Chinese corporations, such as
Alibaba Group Holding is a holding company owned by Alibaba.
(BABA),
JD.com
& (JD)
China is delicious.
(YUMC) has sought secondary listings closer to home, and many fund managers in the United States have migrated into those listings. For mutual-fund managers, this is a very simple move; but, for regular investors, it is more difficult because certain brokerages do not offer direct access to overseas markets. Another reason to avoid Chinese stocks is this: As Chinese officials tighten control over abroad listings, the long-controversial corporate structure employed by many Chinese companies to get over Beijing’s foreign ownership limitations, known as variable interest equity, is gaining increasing attention. Most experts do not expect the structure to be upended, but increasing scrutiny may draw attention to the dangers and cause valuations of Chinese stocks listed in the United States to fall. These clouds are sufficient for Kapryin to cut customers’ allocation to China from overweight to market weight in the near term. He’s not the only one who feels this way. China’s clout in the world ‘Cathie Woods’ is a novel by Cathie Woods.
Ark Innovation is a company that specializes in developing
From an all-time high of 8% in February, the ETF (ARKK) has dropped to less than 1%. Short-term volatility, on the other hand, can be an excellent opportunity to construct long-term positions. Investors should adhere to China-focused mutual and exchange-traded funds that can handle the nuances of the US-China relationship and identify companies that are less exposed to regulatory changes and blacklists. Reshma Kapadia can be reached at reshma.kapadia@barrons.com./n
Read More
