July 26 (Reuters) – Western investors face the risks of investing in US-listed stocks of Chinese companies after Beijing embarked on a regulatory crackdown on large swathes of its economy, from the internet sector to private lessons.
The S & P / BNY Mellon China Select ADR Index, which tracks U.S. certificates of deposit (ADRs) of major Chinese companies listed in the United States, fell 5.9% on Friday after Beijing decided to ban private tutoring for-profit in basic school subjects, causing a share in the sector.
It is the latest in a series of Beijing stocks that have caused the index to lose 18.8% since the start of the year. A series of cybersecurity investigations conducted by Chinese regulators into large tech companies such as Alibaba Group Holding Ltd (9988.HK) and Baidu Inc (9888.HK) has prompted many investors to dump their stocks.
China’s latest crackdown on tech companies was announced just two days after rideshare giant Didi Global Inc (DIDI.N) went public in New York City late last month. Its shares are down 42% since the IPO.
The Chinese Communist Party’s difficult relationship with private companies has always weighed on the minds of Western investors who seek legal and regulatory certainty in placing their bets.
Yet recent moves by Beijing are confusing even seasoned investors who are otherwise accustomed to navigating the murky audit and poor governance of Chinese companies in order to continue growing in the world’s second-largest economy.
Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, where he oversees more than $ 30 billion in assets, said he believes Beijing’s end is to bring capital back to China . He said he was bullish on many Chinese companies looking to long-term consumers due to the country’s emerging middle class, but that it was difficult to assess stocks in the short term.
“The near-term picture is cloudy as Chinese ADR issuers are caught in the crossfire between US regulators demanding more disclosures and Chinese regulators demanding privacy of data on Chinese citizens,” Gokhman said. .
Some investors find these investments too risky. Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago, said he had not held any China-related stocks in his portfolio for the past two years due to political risk.
“What we have done has moved away from corporate fundamentals. It has now become political football and there is no way to analyze that and put it into a financial spreadsheet,” Nolte said. .
The tricky question for many investors is whether they can call the bottom of these stocks. With the S&P 500 at record highs after rallying more than 95% from its March 2020 lows, they are trying to establish whether the next rally could be in Chinese ADRs.
The gap in the trajectory of US and Chinese company stocks has been particularly deep in the tech sector. Regulatory crackdown has removed value from Chinese tech companies, just as US tech giants are on the rise after work-from-home and big data trends accelerated during the COVID-19 pandemic.
“At this point, anyone can guess where (Chinese ADRs) will fall, and where you see that money going is towards the big US tech stocks,” said Joel Kulina, senior trader at Wedbush Securities, specializing in technological actions.
Reporting by Svea Herbst-Bayliss in Boston and Lewis Krauskopf in New York Additional reporting by Noel Randewich in San Francisco and Echo Wang in New York Editing by Greg Roumeliotis and Sam Holmes
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