Analysts Wary of Chinese Stocks: It’s Too Early for a Dragon Market Run

• China stocks face delisting from US stock exchanges
• Beijing signals readiness for more transparency
• Several analysts consider price rally to be premature

The US Federal Reserve’s easy monetary policy and unprecedented liquidity have attracted numerous companies from China to US stock exchanges in recent years. Around 270 companies with parent companies in China and Hong Kong are now listed in the USA. Tensions quickly arose, however, fueled by the Trump administration’s trade policy. But Trump’s successor, US President Joe Biden, also takes a similar position. For example, in the interests of investor protection, the USA requires these companies to disclose their books fully and fairly. But the government in Beijing refuses, citing strict confidentiality laws and national security concerns. She wants to prevent vast amounts of collected data on Chinese consumers from being passed on to US regulators. On the other hand, Washington says that Chinese companies enjoy the trading privileges of a market economy, even though they receive state aid and work in a non-transparent manner.

In December 2020, the US Congress passed the so-called Holding Foreign Companies Accountable Act (HFCAA). The law asked the US Securities and Exchange Commission to close loopholes that allow Chinese companies to block US inspectors from looking at their books. Firms that fail to meet the requirements three years in a row now face delisting from the New York Stock Exchange and NASDAQ. SEC Chairman Gary Gensler has already announced that he will strictly enforce this three-year period. It could be as far as 2024. “The clock is ticking,” Gensler explained.

Beijing signals willingness to compromise

In view of the threat of forced delisting from 2024, investors flocked to Chinese stocks. But apparently Beijing now wants to avert the impending exclusion and has since relented. In March 2022, for example, the China Securities Regulatory Commission (CSRC), China’s top financial regulator, announced that it would amend existing confidentiality laws because they were outdated. The US authorities are now to be granted access to sensitive financial information. As a result, US-listed Chinese stocks, particularly tech stocks that had previously been severely punished, staged an impressive rally.

Analysts cautious

However, investors may have succumbed to euphoria too soon. According to the US broadcaster “CNBC”, several analysts expressed this concern.

“Investors around the world may have been a little hasty. Everything is very, very immature at the moment,” said Shehzad Qazi, for example. “I have the impression that many investors are currently very happy with the progress that has been made, but ignore the fact that there is still a great deal of uncertainty and the unknown,” said the Managing Director at China Beige Book International. “Yes, there have been recent rule changes in China and this seems like a positive step forward. But the truth is that we don’t know exactly which companies the SEC can investigate under US rules.” For example, it is still unclear whether the big players like Baidu, Alibaba and Tencent will actually disclose their books.

According to “CNBC”, Harvey Pitt, CEO of the consulting firm Kalorama Partners, was similarly cautious: “The Chinese government is obviously trying to give the impression that there will be more transparency. But the devil is in the details,” said the former SEC Chairman.

Seema Shah also advises caution: “It will likely require concrete measures to stabilize the Chinese real estate market for this rally to continue. In addition, China’s zero-COVID policy and lockdown restrictions are likely to weigh on consumption and sentiment in the near term, while relations with Russia result in the threat of US sanctions hanging over the markets,” warned the chief of investment strategy at US wealth management firm Principal Global Investors. “Although China may adopt a pro-market stance, it is still too early to speak of a kite market run,” Shah said.

Editorial office finanzen.net

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