Tensions between the United States and China have come to define modern geopolitics. They were escalated in 2018 when President Donald Trump began implementing tariffs on Chinese imported goods. This move was against the urgings of his economic advisory team. Indeed, these events launched the trade war that would continue through Trump’s presidency. While relations between the two superpowers haven’t been as heated since President Joe Biden took office, recent events have experts warning of further tensions. This comes as one of the U.S. government’s regulatory agencies has raised the possibility of removing some of China’s largest public companies from U.S. exchanges if they refuse to comply with security laws. Naturally, this news has several prominent names sliding today. So, is the U.S. delisting Chinese stocks?
Let’s take a look at the facts as both countries examine their options surrounding this news.
Why Is the U.S. Delisting Chinese Stocks?
Today, Bloomberg reported that the Securities and Exchange Commission (SEC) has confirmed that it will be implementing a new law for all internationally based companies that trade on major U.S. stock indexes. Under this law, all companies will be mandated to turn over their books to U.S. regulators to be scrutinized. Failure to comply will result in any companies being removed from the exchange upon which they trade.
Washington has required companies to take part in this procedure since the passing of the bipartisan Sarbanes-Oxley Act of 2002. Only China and Hong Kong have held out, refusing to comply with these regulations.
This news hasn’t been welcome for some of the Chinese companies who trade on American indexes. E-commerce giant Alibaba Group (NYSE:BABA) began declining this afternoon, down 0.4% at close, while some of its peers haven’t faired much better. Fellow digital commerce seller JD.com (NASDAQ:JD) finished the day down 0.85%, and agricultural tech platform Pinduoduo (NASDAQ:PDD) declined by 4.56% for the day. If it really occurs, the U.S. delisting Chinese stocks could certainly pose severe consequences.
Why It Matters
All the names mentioned saw their shares fall earlier this season when regulatory crackdowns from China sent negative shockwaves across multiple sectors. If this new law from the SEC is fully implemented, though, it could definitely prove more serious for these companies who have avoided opening their books to U.S. regulators. It’s also worth noting that under this new law, as many as 200 Chinese companies could face delisting.
In a statement issued by the agency, SEC Chairman Gary Gensler stated the following. “If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the Public Company Accounting Oversight Board (PCAOB).” He continued:
“The finalized rules will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the PCAOB cannot completely inspect. Moreover, foreign issuers will be required to disclose the level of foreign government ownership in those entities.”
Other reports have indicated that China is likely to retaliate against this decision by restricting overseas listings for Chinese companies, thereby forcing its publicly traded companies to return to domestic exchanges. We already saw this last week when China’s government asked Chinese mobile transportation platform Didi Global (NYSE:DIDI) to develop a plan to delist from U.S. markets. That news was unprecedented, but it could certainly be emblematic of more events to come.
The Bottom Line
We don’t know for sure what this new law will mean for markets both domestic and international. What we do know is that this day has been coming for over a year — since before Trump left office.
While it’s not clear how China will react to this, it is likely to employ tactics that prioritize its interests. Anyone whose portfolio includes Chinese stocks that trade on U.S. indexes should be watching closely.
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.
