Unordered law: Investors respond to China’s regulatory risks Reuters

Authors: Svea Herbst-Bayliss and Lewis Krauskopf

(Reuters)-Western investors are struggling to deal with the risks of investing in Chinese companies listed in the United States after Beijing began a regulatory crackdown on large economic sectors ranging from the Internet industry to private tutoring.

The Standard & Poor’s/New York Mellon China Select ADR Index, which tracks the American Depositary Receipts (ADR) of major Chinese companies listed in the United States, fell 5.9% on Friday after Beijing began banning for-profit core school subject tutoring, triggering the stock market Crash. Shares in the industry.

This is the latest in a series of actions by Beijing that caused the index to fall by 18.8% since the beginning of the year.Chinese regulators have conducted a series of cybersecurity investigations on major technology companies, such as Alibaba (NYSE:) Group Holdings Limited and Baidu Corporation (NASDAQ:) have prompted many investors to sell their shares.

China’s latest crackdown on technology companies was announced two days after ride-hailing giant Didi Global went public in New York at the end of last month. Since the initial public offering, its stock price has fallen 42%.

The uneasy relationship between the Chinese Communist Party and private companies has been plagued by Western investors seeking legal and regulatory certainty to place their bets.

However, even experienced investors are uncomfortable because they are accustomed to groping in the vague audits and poor governance of Chinese companies to chase the growth of the world’s second largest economy.

Max Gokhman, director of asset allocation at Pacific Life Fund Advisors, said that he believes Beijing’s ultimate goal is to bring capital back to China, and he manages more than $30 billion in assets. He said that because of China’s emerging middle class, he is optimistic about many consumer-oriented Chinese companies in the long term, but it is difficult to price stocks in the short term.

“The recent situation is unclear because Chinese ADR issuers are caught in a crossfire between US regulators that require more disclosures and Chinese regulators that require data privacy for Chinese citizens,” Gokhman said.

Some investors believe that these investments are too risky. Paul Nolte, a portfolio manager at Kingsview Investment Management in Chicago, said that due to political risks, he did not hold any China-related stocks in his portfolio in the past two years.

“What we have done is out of the company’s fundamentals. It has now become a political football and there is no way to analyze it and put it in a financial spreadsheet,” Nolte said.

The headache for many investors is whether these stocks can bottom out. After rebounding more than 95% from the low in March 2020, they are at a record level, and they are trying to determine whether the next rebound will occur in China’s ADR.

The difference in the stock trends of American and Chinese companies is particularly evident in the technology sector. Just as U.S. technology giants are working from home during the COVID-19 pandemic and the big data trend has accelerated, so regulatory restrictions have inhibited the value of Chinese technology companies.

“At this point, anyone is guessing where (Chinese ADR) will bottom out, and you see these funds flow to the big U.S. technology stocks,” said Joel Cullina, a senior trader at Wedbush Securities who specializes in technology stocks. (Joel Kulina) said.