What happened
Shares of several Chinese stocks listed on U.S. stock exchanges continued their volatile ways as the situation between U.S. and Chinese regulators plays out.
Shares of the large Chinese ride-hailing company DiDi Global (DIDI 0.22%) traded nearly 10% lower as of 10:50 a.m. ET today. Shares of the large Chinese e-commerce players Alibaba Group Holding (BABA -1.19%) and JD.com (JD -3.18%) had fallen nearly 3% and 4%, respectively.
So what
U.S. and Chinese regulators have had a long-standing dispute for decades over accounting practices of Chinese stocks listed on U.S. exchanges. U.S. financial regulators want complete access to audit the financials of Chinese companies that trade in the U.S., but the Chinese government doesn't allow foreign accountants to view the finances of Chinese companies due to national security concerns. In 2020, U.S. lawmakers passed a law called the Holding Foreign Companies Accountable Act (HFCAA), which essentially said Chinese companies would be delisted from U.S. exchanges if U.S. regulators could not properly audit their financials for three straight years.
Last week, Chinese government officials signaled support for U.S.-listed Chinese stocks and said they were working with U.S. regulators on a cooperation agreement. The news sent Chinese stocks soaring. Ever since, Chinese stocks have been up and down as the situation has evolved.
Image source: Getty Images.
Yesterday, the Public Company Accounting Oversight Board (PCAOB), a nonprofit that Congress created in order to watch over public company auditing, said media reports regarding a forthcoming deal between U.S. and Chinese regulators were still "premature."
"If an agreement is reached, we will then proceed with our inspection and investigation activities to determine if the agreement operates as intended ... [but] an agreement without successful execution will not satisfy U.S. law," the PCAOB said, according to Reuters.
In another not-so-great development, the U.S. Securities and Exchange Commission (SEC) added the Chinese social media platform Weibo to its list of U.S.-listed Chinese stocks that could face being delisted for failure to comply with the HFCAA. Prior to the news of the potential cooperation agreement, the SEC listed five Chinese companies that faced delisting: Yum China Holdings, ACM Research, BeiGene, Zai Lab, and Hutchmed.
In December, the SEC said 273 companies faced potential delisting due to the HFCAA, and the regulator will likely name more.
For a beleaguered company like Didi, a delisting could be particularly troublesome. Didi had announced last December that it was planning to delist from the New York Stock Exchange (NYSE) and list in Hong Kong. But the Chinese government has now shut that plan down, citing data security concerns. The Chinese government has also suspended Didi's apps from China's apps stores. While the future is uncertain, it may be better for the company to remain listed on the NYSE.
Now what
Make no mistake, China announcing support for foreign-listed stocks is certainly a big deal, as can be seen in the surging stock prices recently. Still, Chinese regulators can be somewhat unpredictable and a deal hasn't been reached yet.
It also seems like U.S. regulators and the PCAOB are taking a hard line on having U.S. accountants review the financials of Chinese stocks, so it would appear that Beijing may need to make some concessions for this to work. The situation is up in the air, so trade with caution.