Chinese ADRs: delisting fears intensify

It’s been yet another brutal week for already beaten-down Chinese stocks.

The NASDAQ Golden Dragon China Index, which tracks 93 of the largest Chinese companies traded in the U.S., ended Friday (March 11, 2022) around 10% lower, while the Hang Seng declined 3% over the week.

The declines came after the SEC publicly named five U.S.-listed Chinese ADR’s that could be in breach of the Holding Foreign Companies Accountable Act.

The five companies identified by the SEC are:

  • BeiGene Limited (NASDAQ: BGNE)
  • Yum China Holdings Limited (NYSE: YUMC)
  • Zai Lab Limited (NASDAQ: ZLAB)
  • ACM Research (NASDAQ: ACMR)
  • HUTCHMED (China) Limited (NASDAQ: HCM)

Each faces potential delisting should they not begin complying with U.S. accounting and transparency standards.

All five stocks feel steeply on Thursday following the SEC announcement, however investors in other big-name Chinese stocks were clearly spooked too. Alibaba (NYSE:BABA) lost 5% over the week, falling to a new 52-week low. (NASDAQ: JD) plunged 13% over the week, and Baidu (NASDAQ: BIDU) lost close to 5% and now trades at it lowest level since October 2020.

KraneShares moves out of Chinese ADRs

Following the SEC bombshell, expert Chinese investment firm, KraneShares, announced it would be converting all its Chinese ADR holdings to the equivalent Hong Kong-listed stock over the coming months.

“The first five identified ADRs could be delisted in 2024 if they do not come into compliance with the law,” the firm said.

“These companies will not be able to comply with US demands without cooperation between securities regulators in the US and China. As it stands, these companies are prohibited from allowing the Public Company Accounting Oversight Board (PCAOB) access to their audit papers by Chinese law. Therefore, they would have to violate the laws of the jurisdiction in which they operate in order to comply with the laws of the jurisdiction in which their shares are traded.

“This is a fluid situation and we know that the China Securities Regulatory Commission (CSRC) and Ministry of Finance (MOF) have been discussing a potential solution to this issue with the PCAOB.

“We believe a compromise between US and Chinese regulators is still attainable, but we are converting our ADR holdings to Hong Kong shares because we believe doing so is in the best interest of our clients.”

KraneShares added it expects all Chinese ADRs will be found non-compliant unless a resolution is reached between U.S. and Chinese regulators.

A mass-exodus of Chinese ADRs from the U.S. was flagged last year by Chinese finance expert Don Weinland is this Asia Markets article.

“It’s kind of strange in a way to see U.S regulators and Chinese regulators agree on one thing which is that Chinese companies should no longer be listed in the U.S,” said Weinland.

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