What Will Happen to U.S.-Listed Chinese Stocks As Wariness Grows?

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Jul. 28 2021, Published 10:39 a.m. ET

The Chinese government has given the regulatory strong arm to some of its biggest industries. They're particularly targeting Chinese companies with U.S. stock market listings. A lot of big Chinese tech has made its way to U.S. exchanges, and the reality looks quite grim for anyone caught in the crosshairs.

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As recently as a year ago, Chinese exchanges were seeking ways to court their country's biggest companies to stay domestic. Now, the government is shaking things up. What will happen to U.S.-listed Chinese stocks as the wariness grows?

Chinese stocks in the U.S. are coming off of biggest two-day loss since 2008.

According to the Nasdaq Golden Dragon China Index that tracks the 98 largest Chinese firms listed in America, the two-day decline amounted to 15.5 percent. These losses started on July 23 and finished up on July 26 when the U.S. markets reopened for business.

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The latest decline of a similar strength for Chinese stocks on U.S. exchanges occurred in 2008, when America was going through a sweeping economic crisis.

Why is this time different? Because while Chinese stocks are seeing major losses reminiscent of the 2008 financial crisis, the rest of the U.S. market is faring quite well. This is due to the fact that the source of the sell-off isn't general market panic, but a calculated concern over real-time regulatory shifts in the Chinese business economy.

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The Cyberspace Administration of China blocked the ride-sharing app DiDi Chuxing (NYSE:DIDI) immediately after its U.S.-listed IPO, which caused the shares to tank. China's State Administration for Market Regulation (SAMR) targeted Tencent for its monopolistic leverage in music copyrighting. 

Now, Tencent (whose American depository receipts are sold over-the-counter under the ticker symbol "TCEHY") will be required to end its existing copyright agreements and won't be able to enter new ones.

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China's booming tutoring industry just got the regulatory hammer too, which caused a breaking point for U.S.-listed stocks like New Oriental Education & Tech Group (NYSE:EDU) and Gaotu Techedu (NYSE:GOTU).

When the Chinese stock selloff started

These recent losses for U.S.-listed Chinese stocks actually started five months ago in February 2021. The Chinese government has increased the strength and speed of its regulatory decisions on big tech and U.S.-listed companies. Most analysts say that investors should expect this trend to continue, potentially with brute force.

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Whether or not the regulatory changes are beneficial for the average Chinese resident is a nuanced concern, but one thing is for sure. U.S. investors who are still in dodge might not have much of their investment left soon.

Is there a chance for recovery?

There's often a chance for recovery in the U.S. stock market, even when referring to Chinese stocks. However, expect some serious corporate reconfiguration (and equity reconfiguration) over the coming years for major Chinese firms. For most traders, the best bet is to plan an exit if you haven't already. You can reassess a reentry point down the line.

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