Beijing's ongoing crackdown on technology companies has left many investors wondering if the days of Chinese firms listing on U.S. stock exchanges through the American Depository Receipt market are over. If so, how to adjust portfolios to reflect the new reality?
China's actions to date suggest that Beijing's long-term plan is to create a regulatory environment designed, in essence, to discourage Chinese listings on U.S. exchanges. Instead, Beijing appears to want those companies to list in Hong Kong or other domestic markets.
If so, investors allocating to Chinese equities should consider a holistic approach that expands the investible universe from the likely-to-remain-volatile ADR market to Chinese equities traded in Hong Kong (as H shares) and on domestic exchanges (as A shares.) This more comprehensive approach should enable investors to continue to gain exposure to China's growth potential while potentially mitigating volatility.
Over the past year, Chinese policy toward financial markets has grown more restrictive. Late last year, China suspended Ant Group's initial public offering, set to be the largest-ever IPO. This summer, just two days after ride-sharing firm Didi Global Inc.'s IPO, the Cyberspace Administration of China announced it was investigating the firm over national security concerns. And as financial supervisors are making it increasingly difficult to maintain overseas share listings, a number of Chinese tech firms have pulled plans to list in New York as ADRs. Significant regulatory action in July against for-profit, private tutoring companies added to growing investor anxiety that Beijing may be embarking on an extended period of corporate regulatory interference that could broaden beyond the tech sector.
Amid market turmoil, Beijing has sought to reassure international investors that regulators want stability in capital markets. Nevertheless, investors, remembering China's 45% stock sell-off in 2015, are unsettled by the swift, broad crackdown. So, what are investors to do? In China, finding the path forward often starts with taking a step back, in this case understanding China's various equity listing venues.