Chinese stocks in free fall over delisting fears and COVID lockdowns – The Average Joe

    Chinese stocks in free fall over delisting fears and COVID lockdowns

    Victor Lei — Head of Research

    March 15, 2022

    china etf

    March 15, 2022

    US-listed Chinese stocks are falling — over renewed delisting concerns by the Securities Exchange Commission (SEC) followed by a wave of COVID lockdowns.

    What’s the big deal? While the West is removing mask mandates and phasing out restrictions — China is sticking to its “COVID zero” policy — pushing certain provinces back into lockdown in the past week:

    • In several major cities, China shut down factories, closed restaurants and theaters, and banned cross-border travel.
    • China can’t afford to lift restrictions — with its lower vaccination rates and number of intensive care hospital beds.

    Factories are shutting down in parts of Asia — adding even more pressure to global supply chains.

    Delisting fears: Last week, the SEC identified five Chinese companies failing to a US review of company audits — implemented in 2020. If companies don’t meet this rule for 3 years — they can be delisted from US exchanges.

    • While the 5 were less well-known companies — Yum China, BeiGene, Zai Lab, ACM Research and HUTCHMED — delisting fears impacted the entire sector.
    • Per CIO of KraneShares (via CNBC), all Chinese companies will fail to meet this rule — as Chinese law prevents them from having their audits reviewed.

    Analyst views: JPMorgan analyst sees global investors “reducing exposure to the China Internet sector” and downgraded several big names including JD, Alibaba, Baidu and Pinduoduo.

    • Alibaba — one of the most-owned stocks in the Chinese internet sector which is down 74% since its regulatory issues began in 2020 — could fall even lower, per Alex Yao of JPMorgan.
    • Alibaba trades at a trailing price-to-earnings multiple of 23x — compared to an average 144x in the US online retail sector.

    The lesson: Stocks already look really cheap — can often go even lower due to external pressures.

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