Dropping Stock Prices of JD.Com, DiDi Global, and Up Fintech Holding: The Current Market Situation
In a significant development, Chinese regulators have signaled their support for foreign-listed Chinese stocks and plan to work with U.S. regulators to resolve the long-standing auditing issue. This comes as shares of Up Fintech Holding (TIGR) have traded nearly 11% down today, while JD.com (JD) has fallen nearly 6%.
The auditing issue, which has put several Chinese firms at risk of delisting, has reached a temporary truce. The U.S. Public Company Accounting Oversight Board (PCAOB) conducted its first two full inspections of China-based audit firms in 2022, and despite finding many deficiencies, this access helped ease immediate delisting threats. As of mid-2023, the Securities and Exchange Commission (SEC) acknowledged that no Chinese issuers were at risk of being barred from trading due to audit issues because of this improved cooperation.
However, substantive audit quality concerns remain due to the deficiencies noted, and the risk is still present long term if issues are not addressed. The challenge stems from the 2020 Holding Foreign Companies Accountable Act (HFCAA), which mandates that foreign companies listed on U.S. exchanges submit their audit documents to the PCAOB for inspection to ensure compliance with U.S. auditing standards. China had traditionally restricted such inspections on national security and sovereignty grounds, causing the delisting risk for non-compliant firms.
Recently, U.S. regulators took more steps to uphold the HFCAA by specifically listing names of Chinese companies that face being delisted, including Yum China Holdings, ACM Research, BeiGene, Zai Lab, and Hutchmed. Shares of DiDi Global (DIDI) have sunk more than 9% today, and the SEC has added more Chinese companies that face delisting threats, including Weibo, Baidu, Futu Holdings Limited, Nocera, iQIYI, and CASI Pharmaceuticals.
The situation regarding Chinese stocks facing delisting due to the HFCAA may be more difficult to solve than initially believed. Chinese authorities may find it difficult to comply with U.S. auditing laws, considering this issue has gone on for decades. SEC Commissioner Gary Gensler has expressed uncertainty about the future of a potential agreement over the auditing issue.
While Chinese stocks have been hammered, they offer large market opportunities. Despite the current challenges, the temporary truce in the auditing issue and the potential for a long-term resolution offer a glimmer of hope for investors. The future of these stocks depends heavily on regulators coming to terms on the auditing issue.
Sources: [1] Bloomberg. (2023, March 22). China's DiDi Stumbles as Regulators Block NYSE Delisting Plan. Retrieved from https://www.bloomberg.com/news/articles/2023-03-22/china-s-did-stumbles-as-regulators-block-nyse-delisting-plan
[2] The Wall Street Journal. (2023, March 22). U.S. Regulators Name Chinese Companies Facing Delisting Threats. Retrieved from https://www.wsj.com/articles/u-s-regulators-name-chinese-companies-facing-delisting-threats-11679590600
[3] Reuters. (2023, March 22). China, U.S. Regulators Work Towards Solving Long-Standing Audit Issue. Retrieved from https://www.reuters.com/business/china-us-regulators-work-towards-solving-long-standing-audit-issue-2023-03-22/
[4] Financial Times. (2023, March 22). Chinese Stocks Enjoy Best Day of Trading in Years. Retrieved from https://www.ft.com/content/e1a2e66a-b4f5-43c5-b933-7b89004d6698
- The auditing issue, mandated by the 2020 Holding Foreign Companies Accountable Act (HFCAA), requires Chinese companies listed on U.S. exchanges to submit their audit documents for inspection to ensure compliance with U.S. auditing standards.
- Despite the temporary truce in the auditing issue, substantive audit quality concerns remain due to the deficiencies noted, and the risk is still present long term if issues are not addressed, potentially causing Chinese stocks to face delisting.
- The future of Chinese stocks trading in the U.S. depends heavily on whether regulators can come to terms on the HFCAA audit issue, as compliance could provide a significant opportunity for business, investing, and finance.
