Chinese stocks listed in the United States via ADRs look set for a strong April, following months of pain for investors.
Chinese ADRs have been at the centre of intensifying regulatory scrutiny, with the U.S. SEC putting various companies on notice for failing to meet auditing requirements – something that would ultimately lead to a raft of Chinese companies being de-listed from U.S. exchanges.
The problem was seemingly insurmountable because the Chinese companies have effectively been unable to comply with U.S. regulators without the cooperation of the Chinese Government, which won’t let a significant amount of information be released due to national security concerns.
So unnerving the situation, a number of institutional investors have been exchange their Chinese ADR shares for the equivalent shares listed on the Hong Kong Exchange or mainland Chinese exchanges. You can read more about that in this recent Asia Markets article.
However, in the past few days there’s been some big news that indicates a resolution could be just weeks away.
Agreement between China and U.S. within months?
On Friday most U.S.-listed Chinese stocks surged on reports that Chinese regulators are willing to compromise, in order to allow Chinese companies to meet SEC requirements and continue to trade in the U.S.
It was Bloomberg Tax who first reported the news.
“The China Securities Regulatory Commission and other national regulators are in the process of drafting a framework that will allow most Chinese firms to keep their listings, people familiar with the process said, asking not to be named discussing a private matter.
“The framework is expected to provide clarity on what data may trigger national security concerns, said the people. Regulators are debating whether companies that deal with consumer information, such as Alibaba Group Holding Ltd, would automatically fall into that category, one of the people said, adding that processing large volumes of such information wouldn’t necessarily make a firm a security concern,” said the report.
It’s expected that China will allow most technology, consumer and internet companies to be unshackled from the national security restrictions previously imposed on their audits. However, state-owned or part-state-owned companies are likely to maintain the strict conditions, and inevitably delist from the U.S.
China is reportedly planning to implement the changes to the reporting restrictions by mid-year.
If the information is correct, there are at least eight state-owned or part-state-owned companies who’s days listed in the U.S. are numbered. They are:
- China Life Insurance Company Limited (NYSE: LFC)
- PetroChina Company Limited (NYSE: PTR)
- China Petroleum & Chemical Corporation (NYSE: SNP)
- China Southern Airlines Company Limited (NYSE: ZNH)
- Aluminum Corporation of China Limited (NYSE: ACH)
- China Eastern Airlines Corporation (NYSE: CEA)
- Huaneng Power International Incorporated. (NYSE: HNP)
- SINOPEC Shanghai Petrochemical Company Limited (NYSE: SHI)
Most Chinese stocks now on the rise
But for the majority of Chinese stocks, the talk of a rare compromise by China has resulted in renewed confidence.
On Friday, the NASDAQ Golden Dragon China Index, which tracks Chinese companies listed in the U.S. rose 4.7%.
DiDi Group (NYSE: DIDI) rose 12% for the day. Pinduoduo stock (NASDAQ: PDD) closed 6.3% higher, IQIYI Inc (NASDAQ: IQ) lifted 5.5%, Weibo Corp (NASDAQ: WB) closed up 4.5%, and Alibaba (NYSE:BABA) surged 8% at open, although eventually shares closed just 1.3% higher.
It could be the start of much larger run up, given Chinese stocks are currently trading a historic lows, relative to U.S. companies.
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