A Slump in the Market

SEC’s Holding Foreign Companies Accountable Act

and Its Impact on China Concepts Stocks

Robin Zhu - Senior Correspondent, USA

06:00 AM, December 9, 2021

On December 2, 2021, the U.S. Securities and Exchange Commission (SEC) passes amendments to finalize regulations listed in the Holding Foreign Companies Accountable Act (HFCAA), which aims to build a framework for investigating foreign companies’ annual reports and auditing them under the Public Company Accounting Oversight Board (PCAOB). According to the SEC Chair Gary Gensler, “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 PCAOB," and the purpose of this Act is to protect investors, as he said. As the HFCAA becomes finalized, it’s reasonable to foresee investors’ worries on some publicly listed foreign companies, which will be investigated by the PCAOB through the auditing process.

Among all the foreign companies’ stocks, China Concepts Stocks have a remarkable and immediate response to the policy, reflected in the market. On December 3, 2021, during a short period of time, about 187 Chinese stocks had an over 5% drop in market prices, and 89 of them dropped more than 10%. By the time when the market was closed on that Friday, many well-known Chinese stocks, like Didi (Ticker Symbol: DIDI), Alibaba (Ticker Symbol: BABA), JD.com (Ticker Symbol: JD), and NIO Inc. (Ticker Symbol: NIO), all experienced different levels of slumps. The depressed group of China Concepts Stocks seems to be an indication of investors’ loss of confidence in Chinese companies, since the HFCAA requires that all foreign companies must send out their accounting reports to the PCAOB for auditing, and foreign companies that fail to do so for 3 years in series will be asked to be delisted in the U.S. stock market. There’s clearly an obstacle for most Chinese companies to fulfill the disclosure requirements by the SEC, as the Chinese government wishes not to give rights to the PCAOB to run auditing for the operating entities in China. Despite the criticisms that the international market economy and investors’ rights may be harmed, the SEC is asserting following the American law and regulating foreign companies listed in the U.S. stock market.

The recent events happening in the capital market make it reasonable to predict that most of the China Concepts Stocks will follow the momentum and still go down in the short term. Compounded with the consideration that about 40% of the China Concepts Stocks’ prices drop by more than 50% YTD, investors have a relatively high risk in investing in these Chinese stocks, due to the probability that many of them may be delisted. For people who want to short sell the Chinese stocks, there is still a high risk that the stock prices may rebound after a short term, due to the volatility by complex political conditions. One certain thing is that there will be more restrictions for Chinese companies to have IPOs and get listed in the U.S. in the future, under the political trend, so it’s important for investors to re-evaluate the ratio of China Concepts Stocks they put in their portfolios.