Chinese tech stocks are bouncing in Hong Kong trading on Monday thanks to mainland regulators giving ground in a way that looks likely to allow the stocks to remain listed abroad.
The Hang Seng Tech Index was up a heady 5.4% at the end of trading here on Monday. Video streaming site Bilibili ( (BILI) and HK:9626) is the top gainer, up 13.3% in Hong Kong, with other top performances from online health clinics such as JD Health ( (JDHIF) and HK:6618), up 10.9%; Ping An Good Doctor (PIAHY and HK:1833), up 10.8%; and Ali Health (ALBBY and HK:0241), up 9.3%.
Investors are responding to the release over the weekend of draft revisions to China's disclosure rules that would allow overseas regulators to review the accounts of Chinese companies.
This is the key sticking point for the U.S. Securities and Exchange Commission, and something that unless rectified would cause the delisting in New York of all 248 Chinese listings, valued at US$2.1 trillion in the last official count. If the changes come to pass -- and rules that are circulated in China inevitably go into effect -- it looks like Chinese regulators have found a face-saving way for the data to be shared.
There are also strong showings from Chinese electric-vehicle stocks, with XPeng ( (XPEV) and HK:9868) advancing 11.5% and Li Auto ( (LI) and HK:2015) up 10.2%. I highlighted this sector last week as my favorite China play for the rest of the year. Because of their coming new models and exports to Europe, I favor XPeng and Nio (NIO) , which would have joined in today's gains but doesn't trade in Hong Kong, with its stock listed only in New York.
Almost every tech stock in Hong Kong is up, though the gains are more contained for megacaps such as e-commerce monster Alibaba Group Holding ( (BABA) and HK:9988), up 3.6%; WeChat superapp owner Tencent Holdings ( (TCTZF) and HK:0700), up 3.0%; and mobile phone maker Xiaomi (XIACY and HK:1810), up 1.9%.
Search engine operator Baidu ( (BIDU) and HK:9888), the "Chinese Google," is the biggest advancer among the best-known U.S.-listed names, adding 7.8%, a performance almost matched by JD.com ( (JD) and HK:9618), Alibaba's rival e-commerce platform, moving ahead 7.7%.
China's equivalent of the SEC, the China Securities Regulatory Commission, published a statement on Saturday that it is circulating new proposed rules covering confidentiality of company documents and how they can be shared. Notably, it shared the document in English and Chinese, showing the global intent of their scope.
There are 13 proposed articles, with an English version also of each of the specifics. The most important among them is Article 11, which states, "Overseas securities regulators and competent authorities may request to investigate, including collect evidence for investigation purpose, or inspect a domestic company that has been listed or offered securities in an overseas market," as well as the brokerages serving them.
The other articles put much of the onus on the Chinese company to ensure that it complies with Chinese rules governing secrecy and safeguarding state secrets. Chinese law currently forbids Chinese companies from sharing their accounting audits with overseas parties.
The SEC, following a series of scandals and frauds involving Chinese listings in the United States, has insisted on gaining access for its accounting wing, the Public Company Accounting Oversight Board (PCAOB), to review the accounts of Chinese companies that list in the United States. It's a right and reasonable request for Chinese companies to provide the same level of detail and scrutiny that domestic companies offer.
Congress took the issue a step further by passing the Holding Foreign Companies Accountable Act. That new law, which went into effect in December 2020, requires the delisting of foreign companies from any country if they fail to provide access to their financials for three straight years.
The SEC last month started identifying companies that are in violation of the law, which caused Chinese tech stocks to plummet, as I explained at the time. The SEC has now cited 11 Chinese companies as non-compliant with their 2020 numbers, including Baidu and the "Chinese Twitter," Weibo ( (WB) and HK:9898). The first delistings could come in 2024.
These stocks have performed horribly as a result of the tension, coming on top of a crackdown on Big Tech by Beijing that at times looked a lot like an assault on for-profit private companies in general. Weibo is down 19.5% this year, JD.com has surrendered 13.5%, Alibaba is off 8.5%, and Baidu has lost 5.5%. Even over-the-counter stocks have suffered, such as Tencent, down 15.5% despite having its main listing in Hong Kong since 2004.
The companies have been in an impossible situation, as they are forced by U.S. law to hand over audits that Chinese law bans them from providing. Now the Chinese authorities are saying the documents can be provided, with the appropriate approvals from the stock watchdog, the Chinese Ministry of Finance, the National Administration of State Secrets Protection, and yet more entities.
The secret sauce
One reason China has stopped Chinese companies from sharing their audits is that China has a very broad definition of what constitutes a "state secret." Energy use, population movement, even the birthdays of army generals have been construed as "state secrets" in the past.
The new rules doing the rounds provide a way for companies to share "state secrets" or "government work secrets" by signing a nondisclosure agreement with the other party. "Where there is ambiguity or dispute over the identification of a state secret, a request shall be submitted to the competent secrecy administrative department for determination," the rules say.
The new rules still say that all documents should remain in China, which would require the PCAOB to conduct its audits-of-audits on site. But Article 9 does say there will be a procedure for getting "prior approval by competent authorities" for sharing documents overseas.
There's another problem that has yet to be overtly addressed: The new U.S. law requires companies to say whether they are owned by a foreign government or national body. It also requires Chinese companies to identify any board members who are also members of the Chinese Communist Party and to provide any language written into their company charters that refers to the CCP.
Although many Chinese companies listed abroad are entirely privately held, there is also a massive network of state-owned enterprises in China, often held through an intricate corporate hierarchy of holdings by cities, provinces and other state-owned national enterprises. The Chinese Communist Party has also written itself into the charter of some companies as the ultimate controlling power of a company, superior to and able to override the decisions of the company board.
That isn't fair to shareholders who, by rights, own a stake in a company and its control. How Communist board members will be identified or whether the charter language will be disclosed is not addressed in the new rules, though those facts could simply be treated as "state secrets" that require approval to disclose.
There has been a back and forth on whether there has been progress toward sharing audit information. Reports in China suggest mainland regulators have already asked companies such as Alibaba, Baidu and JD.com to prepare audit disclosures that could be shared abroad.
Alibaba shares rallied 45% in just two days, as I explained in March, after Vice Premier Liu He said Chinese and U.S. regulators have made "positive progress" on talks over the audit data and are "working on forming a specific plan for cooperation." But that optimism was dashed days later when the SEC countered that it was "premature" to say there's any concrete agreement to move ahead.
The bottom line is that the Chinese regulators have made a substantial concession to the country's accounting rules. This appears to be the breakthrough required to keep Chinese companies listed in New York. For holders of those shares, it should be good news indeed.