On Thursday, the US-traded shares of major Chinese tech companies saw steep drops as the US Securities and Exchange Commission (SEC) named several Chinese companies that face delisting.
The Nasdaq Golden Dragon China Index, which tracks stocks of Chinese companies listed in the US, plummeted by as much as 10% on Thursday to 6,535 points, the biggest slide since October 2008, Bloomberg reported.
Shares in more than 10 US-listed Chinese tech companies fell more than 10%. For example, iQiyi dropped 21.71%; Pinduoduo fell 17.49%; Bilibili 14.10%; NIO 11.90%; Parkson China 10.94%. Alibaba and Xiaopeng dropped by 7.94% and 9.01%, respectively.
Why it matters: The market sell-off is a sign that investors are taking notice of a tougher stance from the US stock market regulator towards US-listed Chinese companies.
The SEC said Thursday that five Chinese companies, fast-food chain Yum China Holdings, biotech groups BeiGene, HutchMed Limited, Zai Lab Limited, and technology firm ACM Research, may face delisting for failing to disclose information, according to the Holding Foreign Companies Accountability Act (HFCAA).
The US passed the act in 2020, but this is the first time that the SEC has threatened companies of an actual delisting. The five named companies can submit evidence disputing the commission’s charges until March 29.
According to the act, Chinese companies and their auditors would have to open their books to US inspections, which companies like Alibaba and Baidu had previously refused to do.
READ MORE: US-listed Chinese firms are on thin ice
Politics or financials: Responding to the SEC’s delisting warnings, the Chinese government said it welcomes measures to improve companies’ financials but is “against politicizing securities regulations,” according to a Friday response from the China Securities and Regulatory Commission.
Some analysts think SEC’s move is more about politics than the companies’ financials. “Most things are about politics now, both in China’s own domestic securities regulation, or US-China securities regulation disagreement,” Ren Liqian, director at exchange-traded fund sponsor and index developer WisdomTree Investments, said in a Friday Twitter post.
She expects the SEC list to grow as more companies report 2021 annual earnings in which the auditor information is used.
Tech companies that released their fourth-quarter earnings from last year took the brunt of the market blow. On Thursday, JD shares sank 16% even though its Q4 earnings beat market expectations. Shares of Ke Holdings slumped 24% after posting a Q4 report, which investment bank Jefferies considered a “turnaround story.”
“Today’s company earnings numbers are also not bad”, Ren noted. “It’s less about this year’s fundamentals, but how much the US wants to tie Chinese companies to Russian sanctions and future impact on fundamentals,” she posted.
Meanwhile, the incident may further boost the Hong Kong stock exchange, a popular alternative to the US market for Chinese tech companies. Since Alibaba launched a dual listing in Hong Kong in 2019, many Chinese tech firms started to look to list closer to home amid the backdrop of escalating tensions between China and the US. This homecoming trend grew stronger after Luckin’s fraud scandal.