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Although China’s latest move may not come as a surprise, market analysts believe it could threaten both the IPO’s sector and the popular Chinese ADR market.
China is planning to stretch its oversight on the increasingly growing Chinese companies listed on US exchanges. Some of the country’s most powerful companies including the vehicle for hire company Didi Global Inc (NYSE: DIDI), e-commerce company Alibaba Group Holding Ltd (NYSE: BABA) and Tencent Holdings Ltd (HKG: 0700) are reportedly under pressure as Beijing is looking to disrupt the $2 trillion market being enjoyed by American investors off the back of Chinese firms.
The State Council in a statement on July 6 stated that the rules of the overseas listing system for domestic enterprises will be updated while tightening restrictions on cross-border data flows and security. Data from the US and China Economic and Security Review Commission revealed that there were at least 248 Chinese companies listed on three major exchanges in the United States with a total market capitalization of $2.1 trillion. The commission also stated that there are eight national-level Chinese state-owned enterprises currently listed in the US.
Although China’s latest move may not come as a surprise, market analysts believe it could threaten both the IPO’s sector and the popular Chinese ADR market. The increased regulatory pressure has experienced a loss of a third of its value since it peaked in February.
The Invesco Golden Dragon China ETF tracks US-listed Chinese shares consisting of American Depositary Receipts (ADR’s) of companies that are incorporated and have their headquarters in mainland China. ADRs have been an effective way for US investors to purchase stakes in foreign companies.
BCA Research chief global strategist Peter Berezin in a note released on July 7 stated that,“US investors will have to consider the risks of owning ADR’s at a time when tensions are brewing between China and the United States while all global investors will have to balance the allure of China’s vast addressable market with the possibility that officials may reshape company prospects at the stroke of a pen via the imposition of regulatory strictures.”
Republican Sen. Marco Rubio, speaking to reporters on July 7 also stated that it was “reckless and irresponsible” to allow Didi, describing it as an “unaccountable Chinese company,” to sell shares in an exchange in the United States.
Didi’s stock took a hit of almost 20% on Tuesday after Beijing announced that it is suspending new user registrations as part of a cyber-security investigation. The ride-hailing company again suffered losses on July 7, after hitting fresh lows amid China’s decision to crackdown on local firms with listing abroad.
Didi lost 4.6% in New York trading to close at $11.91 whiles ADR shares fell 20% in Tuesday’s session, are now trading 15% lower than its $14 asking price in the IPO. The Chinese company’s offering was the second-largest U.S.-listing for a Chinese firm on record. Didi has now lost over $17 billion of market value so far this week, including almost $15 billion on July 6 alone.