Published: March 31st, 2021
Several China-listed stocks tumbled by double digits in the week that ended on Saturday, March 27. The decline was caused by a new Securities and Exchange Commission requirement that foreign companies submit information about their affiliation with their respective governments.
The Securities and Exchange Commission (SEC) of the U.S. is proposing a new rule that requires foreign companies to present documentation about government influence and affiliation. According to market insiders, the proposal is giving China investors sleepless nights.
The proposed law is among the many snags that keep popping between U.S. investors and their Chinese counterparts. China stocks have experienced correction for the past several weeks because of the hiccups. The new rule is intensifying the bleeding, especially for stocks listed in the U.S.
The most affected stocks in the week that ended Saturday, March 27 include GSX, which shrunk by 57%, and Tencent Music, which decreased by 36%. Other stocks are Vipshop, Baidu, Bilibili, Trip.com, and Alibaba. The said stocks shrunk by 6% and 34%.
The SEC rules target all foreign-listed companies. However, they specifically aim at China. The oriental country has consistently conflicted with the U.S. over the latter’s efforts to watch the audits of its companies.
At the same time, the SEC adopted temporary final amendments to execute the Holding Foreign Companies Accountable Act. The new rules require companies to submit documents that verify that they are not properties of the national government in the countries where they are domiciled and that they are not influenced by any government.
The rule also requires Chinese companies to name every board member and most especially, individuals who are officials of the Chines Communist Party. Under the new regulations, the SEC has the authority to delist companies that fail to comply with this law after three years.
According to Jay Clayton, the immediate former head of the SEC, the agency’s move has begun implementing the new rule may have rattled the trading community. He said that the rule is Congress’s way of saying that Chinese companies operating in the U.S. should not continue enjoying an effective exemption.
Clayton added that the rule and the audits it demands from the Chinese companies is an indication that Uncle Sam wants its collaborators to come into compliance with U.S. law. However, the new rules are not the only problems plaguing Chinese investors.
March has been particularly rough for traders in China. The country’s CSI 300, the index that measures the trends of the leading 300 stocks in the country, has shrunk by more than 3% year-on-year.
The CSI 300 was among the leading indexes in the world by performance for the first six weeks of 2021. At one point, it increased by more than 15%, far outshining stock indexes in the U.S. and Europe, and almost all of Asia. The index’s troubles began soon after the Chinese New Year.
Brendan Ahern, the chief investment officer at KraneShares China Internet, a fund that specialized in U.S.-listed China stocks, said that the Chinese technology sector has now suffered many of the valuation problems that U.S. tech stocks have experienced. Overall, growth names, including China growth stocks, are suffering from cyclical/value rotation, Ahern added.
The EFT specialist noted that huge blocks of trade have been going off in many China names recently, including Vipshop, Tencent Music, and Baidu. The market is speculating that the said trades are a result of forced liquidation by one or more funds, Ahern added.
Other market observers are taking note of the huge trading that Ahern referenced. For instance, Tencent Music often trades roughly 17 million shares a day. However, on Friday, March 26, the volume rose to almost 300 million shares by the end of the session.
Steve Sosnick, the chief strategist at Interactive Brokers said the only logical explanation for the huge blocks being traded recently is that traders have legitimate fears that some stocks may be delisted. Besides, some of the political happenings that heighten tension between the U.S. and China are worrying many traders, he added.
Sosnick said it almost is like many traders are crying to get out but it is not clear why. He finds the situation both weird and worrying considering that Morgan Stanley, Credit Suisse, Nomura, and Baillie Gifford are Tencent Music’s largest shareholders.
KraneShares China Internet EFT has witnessed the ballooning trades that Sosnick highlighted. In the fund’s email to customers, it said that it has noted that shares that traded north of 5 million units a day earlier in the week that ended on Saturday, March 27, pushed almost twice the normal volume, trading 10 million shares on Friday, March 26.
Pressure is not only coming from U.S. agencies. China has done its fair share of ruffling feathers. In November, Chinese regulators stunned investors by nipping Ant Group’s IPO in the bud, and at the eleventh hour.
Chinese agencies have also complained about excessive system leverage and inflated stock prices. Recently, they fined Tencent Holdings, cab-hailing firm Didi Chuxing, and search engine Baidu for violating monopoly laws.
Aside from going for what appears to be their own, Chinese authorities are after apparel companies, in what seems to be a result of the war of words between Beijing and Washington. Nike, H&M, and Adidas, all dropped during the week as major influencers in China social media encouraged a boycott of the companies over their recent remarks about forced labor in the Uyghur autonomous region.
Ian Bremmer, the president of Eurasia Group, said this is China’s boldest statement this far. According to him, the populous Asian nation is affirming to corporations and nations all over the world that its market is important and whoever wants access it must play by its rules.
The ugly side of the U.S.-China tensions appeared again when China-listed stocks shrunk over fears of new regulations by the SEC. The new rule requires Chinese companies to disclose far more than they are comfortable doing. It is just one of the many challenges Chinese investors are struggling with at the moment.