Yesterday afternoon U.S. regulators announced they were moving forward with a new policy that left investors bracing for impact. The Securities and Exchange Commission (SEC) has confirmed that international companies who do not comply with U.S. regulatory requirements will be subject to expulsion from the country’s major indexes. For the Chinese stocks that trade on U.S. exchanges, this was not welcome news, as it cast considerable doubt on their futures.
Shares of such companies quickly began falling, but before trading began today, one ramification of the new law became apparent. Chinese ride-sharing giant Didi Global (NYSE:DIDI) announced it would be complying with the Chinese government’s request to delist from the New York Stock Exchange. Other Chinese stocks haven’t been reacting well to the news.
What’s Happening With Chinese Stocks
Within the first hour of trading today, three prominent Chinese stocks have started to fall. E-commerce giant Alibaba (NYSE:BABA) is down by 7%, while online retailer JD.com (NASDAQ:JD) and multinational IT conglomerate Baidu (NASDAQ:BIDU) have both fallen by more than 8% as of this writing. All three companies continue to decline and show no signs of rebounding anytime soon.
DIDI, meanwhile, isn’t fairing much better, declining by almost 10% so far. Despite a slight rebound last week, the stock has been struggling since reports first circulated that the company was considering complying with the Chinese government’s request, prompted by concerns involving data security. It was initially written off as unprecedented and therefore unlikely, but the recent news from the SEC likely provided the perfect incentive for the company to set its sights on a market homecoming.
Why It Matters
DIDI’s decision has investors scrambling to determine the right course of action regarding their Chinese investments. This certainly makes sense. The data security concerns that led the company to delist could certainly cast a shadow of doubt over many of Didi’s peers, calling into question their viability as investment vehicles. Noted hedge fund manager Ray Dalio, know for his investments in Chinese stocks, hasn’t commented on what this news may mean, despite recently coming under fire for overlooking China’s record of human rights abuses in his investment decisions.
As of now, it’s unclear how other Chinese companies will react to the SEC’s decision. While foreign companies that enjoy trading on American exchanges have been asked to disclose their financial information to U.S. regulators since 2002, China and Hong Kong remain the two jurisdictions that have held out, despite 50 other nations choosing to comply.
What It Means
Until more companies start weighing in, we won’t know for sure what it will mean for Chinese stocks. It’s possible that some companies will follow DiDi’s lead and join the homecoming trend. However, part of that decision will likely be affected by how Wall Street reacts to the policy. It’s worth noting, though, that DIDI was in trouble before this ruling was handed down from the SEC. Indeed, plenty of investors felt uneasy as the uncertainty surrounding it continued to grow.
Any investors whose portfolios include Chinese stocks that trade on the NYSE or Nasdaq should be watching closely as this story continues to unfold. Didi’s decision could be the start of a powerful new trend. Alternatively, it could be a flash-in-the-pan instance of a company sidestepping regulatory orders to avoid problems down the road.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.