President Donald Trump signed legislation that paves the way to push Chinese companies off U.S. exchanges, if regulators on both sides don’t come to a compromise around longstanding audit and disclosure issues. That move was anticipated and creates questions longer-term, but big Chinese internet stocks could have bigger near-term problems—at home—as regulatory scrutiny intensifies.
Larger investors have been relatively sanguine about the delisting bill, noting at least a three-year window for regulators to work out a compromise and to sort out how to implement. The legislation addresses longstanding issues related to Beijing’s refusal to allow the Public Company Accounting Oversight Board (PCAOB) oversight of audits of Chinese companies, citing national security and state-secret laws.
If no compromise is reached, fund managers expect most companies to seek listings closer to home in Hong Kong or mainland China—something many of the largest have already done. While it may be harder for smaller retail investors to buy these stocks on foreign exchanges, many larger fund managers have already begun swapping out their holdings.
More pressing is the pressure widely held Chinese internet giants are facing at home, rather than the U.S. The news out of China’s most important annual economic meeting isn’t so rosy for them, with officials committed to anti-monopoly measures targeting internet behemoths and acknowledging that large platform companies—think
Alibaba Group Holding
(700.HongKong)—have misused their dominant market position, write TS Lombard economists Rory Green and Bo Zhuang in a note to clients.
Overnight, Chinese state media reported the country’s former finance minister Lou Jiwei hinted at possible restrictions on the number of banks a fintech platform could join with to mitigate the amount of power they could accrue.
It’s the latest talk of increased regulatory scrutiny after the surprise scuttling of fintech giant Ant Group’s much-anticipated public offering and the backlash against Ant and Alibaba co-founder Jack Ma.
“Right now, it all feels like wrist slapping—a reminder to the big internet players of [Communist] Party power and making sure everyone else falls in line,” says Laura Geritz, manager of the Rondure New World Fund. Both stocks haven’t been that expensive, in part because of the risk that the monopoly doesn’t lie with the company itself but ultimately with the government, Geritz adds.
Though she owns both Alibaba and Tencent, Geritz has been underweight, in part, because of the expectation technology giants everywhere are going to come under the limelight of antitrust pressure as global inequality grows. The other reason: There are better opportunities in smaller companies and other markets as investors look to play the economic recovery and more battered companies see easier year-ago comparisons.
TS Lombard’s economists also are lukewarm in the near-term on China. “We expect pressure on their profits and business lines. This is a headwind to MSCI China and a reason why we are neutral China equities,” the duo wrote to clients.
Shares of the
iShares MSCI China
ETF (MCHI) were down 0.22% at $80.17; Alibaba shares were flat on Monday while Tencent’s shares fell 1.4% in Hong Kong trading.
Write to Reshma Kapadia at firstname.lastname@example.org