What happened
For the second day running, Chinese tech stocks Alibaba Group Holding (BABA 0.27%), Baidu (BIDU +0.17%), and electric vehicle maker Li Auto (LI +5.03%) tumbled.
As of 3:05 p.m. ET, Alibaba shares had shed 5.7% of their worth, Baidu stock had fallen 10.5%, and Li Auto was leading the whole Chinese tech space lower with a 15.2% loss.
Image source: Getty Images.
So what
What's the problem with Chinese tech today?
Basically, the story goes like this: Yesterday, the U.S. Securities and Exchange Commission (SEC) put China-based, U.S.-listed companies Yum China Holding, ACM Research, BeiGene, Zai Lab, and Hutchmed on its warning list foreign companies at risk of delisting from U.S. exchanges for failure to comply with the Holding Foreign Companies Accountable Act (HFCAA) of 2020.
Under the HFCAA, the SEC is authorized to "publicly disclose on its website the list of Commission-Identified Issuers [and] the number of consecutive years that an issuer has been identified as a Commission-Identified Issuer" in order that "investors and market participants ... have sufficient notice regarding whether a security that they hold or plan to hold is [at] risk that such security may be subject to a trading prohibition in the future."
HFCAA says that if a foreign company fails to permit U.S. auditing firms to inspect its books for three years in a row, the SEC can ban its securities from trading in the U.S., and delist its stock from U.S. exchanges. Once that happens, investors will face significant difficulties selling their shares.
Now what
Now granted, none of Alibaba, Baidu, or Li Auto were among the five stocks named and shamed by the SEC on Thursday -- but that doesn't mean they won't end up on the list eventually.
Indeed, Baidu first listed its stock in the U.S. in 2005, and Alibaba Group came to America in 2014, so their three-year grace periods are already far gone. Li Auto stock listed in the U.S. only in 2020, and so presumably has more than a year left before it needs to worry about delisting. That didn't prevent the stock from suffering the steepest losses of the group today, however.
Indeed, the threat of delisting could come sooner rather than later. As UBS Global Wealth Management Chief Investment Officer Mark Haefele told Barron's yesterday: "[T]he five companies [that were put on the SEC's list Thursday] were not singled out by the SEC, but were named as they were the first U.S.-listed Chinese companies to have filed their 2021 annual reports. We can expect more companies to be named in the coming weeks."
Whether the SEC is going to charge ahead and add two of the biggest Chinese names ever to trade in the U.S. -- Alibaba and Baidu -- or a highlight as high-profile a player in the red hot EV space as Li Auto, remains to be seen. The fact that the SEC didn't shy away from naming high-profile Yum China Holding, though -- which runs the Yum! Brands' KFC and Taco Bell in China -- suggests the SEC might be looking for publicity, and quite willing to make a splash with future announcements.
If shareholders in Alibaba and Baidu, and Li Auto, too, are feeling nervous today, I think they have a right to be.
