A new move by the Securities and Exchange Commission to force Chinese companies off US stock exchanges helped trigger the worst drop in US-listed Chinese stocks since the global financial crisis and sparked a second sell-off in Hong Kong. .
The steep declines come on top of a trying time for Chinese stocks, some of which have now lost 40% or more in value over the past six months. They have already been rocked by a series of regulatory crackdowns from Beijing and caught in the general market malaise caused by high inflation, the war in Ukraine and the prospect of higher US interest rates.
The Nasdaq Golden Dragon China Index of China-focused U.S.-listed companies closed down 10% on Thursday. That took the index, which includes many U.S. certificates of deposit, to its lowest since 2016, and marked its biggest one-day percentage drop since October 2008, according to data from Refinitiv.
Many stocks posted double-digit declines, with e-commerce groups JD.com Inc.
and Pinduoduo Inc.
drop of 16% and 17%, respectively.
Shares in Hong Kong fell sharply on Friday before recovering some of their losses. The city’s Hang Seng index ended down 1.6%, while the Hang Seng technology index fell 4.3%.
On Thursday, the SEC tentatively named five companies, including biotech group BeiGene ltd.
and Yum China Holdings Inc.,
the KFC operator in China, as companies whose audit working papers could not be inspected by US regulators.
A 2020 law, the Holding Foreign Companies Accountable Act, would ban trading in the securities of companies whose auditing documents cannot be verified for three consecutive years. Morgan Stanley strategists said they expect the SEC to add more names to the tentative list in the coming weeks as those companies release their annual reports.
“We’re definitely in complete dislocation when it comes to sentiment and China,” said Andy Maynard, head of equities at China Renaissance. “This is just another nail in the coffin for investors when it comes to China and in particular ADRs.”
The market value of the MSCI China index has fallen about $1.45 trillion from a high in February last year, when it was worth some $3.6 trillion, the data shows. from Refinitiv.
JD.com on Thursday reported better-than-expected quarterly adjusted earnings and strong guidance for this year, Sanford C. Bernstein analysts said in a note to clients. “None of that mattered,” given the SEC news, they wrote.
China’s securities regulator said it continues to engage with the US Public Company Accounting Oversight Board, the federal audit watchdog overseen by the SEC. In a statement Friday, he said he respects foreign regulators overseeing accounting firms, but opposes the politicization of securities regulation.
Yum China said that as it stands, it will be delisted from the New York Stock Exchange in early 2024 unless it is excluded from the law or its auditor can be fully inspected. “The company will continue to monitor market developments and evaluate all strategic options,” he said.
Yum China and many other companies have already secured a second listing in Hong Kong, meaning their shares could continue to trade if thrown out of US markets. Some of Thursday’s steepest declines were in companies that failed to obtain such a listing, including Pinduoduo and real estate portal operator KE Holdings. Inc.,
which fell 24%.
BeiGene said it is working to comply with foreign corporate liability law and plans to maintain its listings in New York, Hong Kong and Shanghai.
Another of the named companies, Zai Lab ltd.
, said he was working to hire an accounting firm whose work could be inspected by US regulators. “The company’s provisional identification does not mean that the company is about to be delisted by the SEC from Nasdaq,” he said.
Bankers and lawyers say Chinese companies are now more actively considering IPO listing in Hong Kong, a way of going public that doesn’t require a company to raise capital or sell new shares.
Onshore Chinese stocks have been relatively shielded from the regulatory pressure that has hit their offshore counterparts. The CSI 300 index rose 0.3%, rebounding from some losses early in the day.
Write to Dave Sebastian at [email protected]
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