Should ETF Investors Be Worried About The Delisting Of Chinese Equities?

The current issue is this: does a Chinese company such as Alibaba fall under the regulatory jurisdiction of the U.S. PCAOB because it is listed on the NYSE, or under the Chinese equivalent of the PCAOB because it is a Chinese company?

Most of the Chinese companies listed on the NYSE use the Chinese branches of the Big Four U.S. auditors. Chinese firm Luckin Coffee—which has been accused of committing accounting fraud—used EY as its auditor. But most news articles missed the fact that EY didn’t certify Luckin’s recent annual report, which is believed to have covered the period when the fraud allegedly occurred. Presumably for legal reasons, EY has been silent on whether its auditing independently uncovered fraud. Emerging markets companies generally carry a valuation discount for the possibility of accounting fraud, so it is not evident that delisting would help protect U.S. investors.

4. Other Regulatory Risks in Chinese Equities (Besides Delisting)

Chinese equities have other risks beyond delisting. If U.S. public opinion were to turn sharply against China—if, for example, an investment in any Chinese stock was seen as analogous to investing in South Africa during the apartheid era—then there would be substantial divestment, which could lead to lower valuations. 

So far, that kind of opinion has not translated into mainstream investment actions. Based on most of the sanctions imposed to date, the non-state-owned segment of the Chinese equity market is likely to be less politically controversial than banks or state-owned energy firms. The latest White House executive order forbidding investment in some Chinese equities with military ties was also mainly directed toward state-owned companies.

Chinese technology companies also face relentless headwinds from Chinese regulators, such as Ant Group’s IPO debacle and China’s platform antitrust regulations released in November for comments. On December 14, subsidiaries of Alibaba and Tencent were fined the maximum amount allowed of 500,000 RMB (about $77,000) for not filing for their acquisitions. Around the same time, Alibaba, JD, Meituan, Pinduoduo, etc., were sternly warned by the People’s Daily against getting into the community grocery group shopping business , with the implication that these tech giants are threatening jobs of generally lower skilled local grocery workers.  

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Disclaimer: Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. U.S. investors only: To obtain a prospectus containing this ...

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