Chinese stocks a step closer to getting removed from US due to auditing rules

by r2002

TLDR Your favorite Chinese stocks will be fine. NioXpev, and BABA are all audited independently by Pricewaterhousecoopers. Earlier this year BABA’s CFO said they anticipate no problem with complying with US regulations.


WSJ reports that next week the House will consider a measure that will force Chinese companies traded on American exchanges to follow American auditing rules — or face getting delisted.

This proposal has strong bipartisan support. The Senate version was passed unanimously.

Reasons why it might not pass:

  • Wall Street firms have made $1.4 billion in fees underwriting these banks.
  • US pension funds own a lot of these Chinese stocks.
  • SEC general counsel Dan Goelzer thinks this is a way for US government to gain “a lever” in negotiations. Indicating that they are not expecting to go through with it, but rather to use it to get some reasonable accommodations from China.

Good news:

  • If it passes it will give Chinese companies 3 years to comply. That’s a long time for both countries to find some compromise.
  • The worst case scenario is that the Chinese companies will fold your shares into the Hong Kong Stock Exchange. So you can still trade if you’re on a platform that works with the HKSE. So no one is going to lose their shares.
  • Rules like this may prevent future Luckin Coffee incidents. The increase in public trust in Chinese stocks might actually help their companies grow in the long run.
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The biggest companies hit will be the directly state-owned companies. They will probably never say yes to US auditing. You can find a list of China state-owned companies here (PDF) — they are the companies with asterixis next to their names.

Note the most popular Chinese stocks are not state-owned: BABA, JD, PDD, NTES, NIO, TME, YUMC, IQ, LI, XPEV, WB, DOYO, JKS, NIU, KNDI, and BYD.

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Analysis

When this news hit the general public on Monday, you will see at 3-5% drop in some Chinese stocks. People are not going to read the entire article. They are just going to read the headline and start panicking. I think this represents a good opportunity to buy the dip on some of these companies, especially BABA — which is criminally undervalued, and BYD — the best EV play and Warren Buffett stock that no one is talking about.

Our favorite meme stocks like NIO and XPEV are going to be fine. These companies are looking forward to penetrating the American market — they are not going to jeopardize their relationship with America by refusing auditing rules.

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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