U.S. Listed Chinese Stocks in Media Spotlight
You may have noticed media articles last Friday regarding U.S. listed Chinese stocks that had a negative impact on share prices.
Let me briefly explain and then highlight how we will deal with these emerging issues in our portfolio.
In the midst of Congress taking a more confrontational attitude towards China, Senator Marco Rubio has been advocating and has introduced legislation calling for stronger investment restraints and greater scrutiny for Chinese companies listed on U.S. exchanges as well as Chinese stocks in stock indexes and U.S. pension funds.
It goes without saying that the SEC should ensure that Chinese stocks and international stocks should meet the same transparency and disclosure standards of publicly traded U.S. stocks.
One issue is that some Chinese companies have apparently have not been complying with PCAOB (Public Company Accounting Oversight Board) standards.
There are 156 Chinese companies, including at least 11 state-owned firms, listed on the three largest U.S. exchanges—the NASDAQ, New York Stock Exchange and NYSE American—according to a report by the U.S.-China Economic and Security Review Commission.
I have been aware of the Rubio legislation, but what escalated matters considerably were reports last Friday that the Trump Administration is going well beyond these accounting concerns by discussing ways to limit U.S. investors’ portfolio flows into China.
Among the options the Trump administration is apparently considering are delisting some Chinese companies from U.S. stock exchanges and limiting Americans’ exposure to the Chinese market through government pension funds.
This may all be talk and come to nothing in the end but, at a minimum, this noise is another headwind for Chinese stocks.
Let me make a few points in explaining how we’ll handle this issue in the portfolio.
First, I avoid on principle Chinese state-owned stocks, which would naturally be the first target of any legislation.
Second, we have a diversified portfolio with four Chinese stocks: Luckin Coffee, (LK), Lexinfintech (LX), Alibaba, (BABA) and Tencent (TCEHY).
None of these stocks have any regulatory issues related to the Rubio proposed legislation but Friday’s pullback pushed LX down below our 20% trailing stop loss so I’m moving LX to Sell despite its strong fundamentals and story.
LK is trading just above our entry price so we’ll need to watch it closely, while Alibaba and Tencent are both widely held and respected and thus should be fine. New recommendations will be in the same vein.
Here is a link to a report that, while a bit dated, has a list of the Chinese companies listed on U.S. exchanges (called Chinese ADRs, American Depositary Receipts) with companies that were out of compliance with the PCAOB highlighted.
These developments will likely result in the market unnecessarily punishing a number of quality Chinese companies that fully meet the highest standards. At lower prices, that will make them prime buying opportunities.