After a sharp adjustment last year, US tech stocks have rebounded strongly since the start of 2023. But when it comes to Chinese concept stocks, major overseas asset management giants show a stark divide in their stances, mainly because the divergence in auditing standards between China and the United States and the risk of delisting US-listed Chinese stocks have still been stirring up waves. So, what’s behind this intricate dance of international finance?
Alibaba’s Bold Reforms Stir Optimism
In a fascinating turn of events, Alibaba announced a large-scale restructuring at the end of March, dividing its business into six independent companies. Each department can now raise external funds and seek listing independently. Does this symbolize a relaxing grip on tech companies in China?
Analysts seem to think so. “We have a positive view on the impact of individual business divisions going public and disclosing,” says Shawn Yang of Blue Lotus Research Institute. Dan Ives of Wedbush Securities also shares this sentiment, arguing that Alibaba’s plan to split off the cloud computing department is a “wise strategic move” and “a step in the right direction for the Alibaba story.”
Alibaba fell short of Q1 revenue expectations. These variances caused the Hong Kong-listed shares of Alibaba to plunge by nearly 5% last Friday. On the other hand, search engine giant Baidu exceeded expectations with its Q1 2023 revenues and profits; Tencent Holdings recovered growth after consecutive quarters of flat and negative development.
Some insiders believe that after over two years of adjustment, the valuation of CCS has become significantly undervalued. With the potential uplift in corporate earnings and market confidence, is there hope for fund managers to return to Chinese assets?
Big Players Make Their Move
Despite the rollercoaster performance of these Chinese tech giants, several foreign funds remain undeterred and have seized the opportunity to sell off amid the rebound.
Bridgewater Associates has reduced or cleared its holdings in several Chinese concept stocks, including RLX Technology, GaoTu, Huya, Douyu, Futu, Li Auto, etc., with reductions in individual stocks all exceeding 50%, and it has completely cleared its holdings in Baidu.
The century-old British asset management giant Baillie Gifford has reduced its holdings in NIO, BeiGene, Baidu, and Beike and completely cleared its holdings in NetEase.
On the other hand, Michael Burry of Scion took a bullish stance on the Chinese market and significantly increased his positions in JD.com and Alibaba. His fund added 175,000 shares of JD.com and 50,000 shares of Alibaba at nearly USD 13 million. This deviates starkly from the commonly held bearish view of Chinese equities among his peers.
George Soros, the renowned hedge fund mogul, offloaded 500,000 option shares in NIO while concurrently acquiring 200,000 option shares in JD.com.
Recent Developments on the Delisting Risk
Based on the US’s Holding Foreign Companies Accountable Act (HFCAA), Chinese companies could face delisting if their auditors do not meet US accounting standards. Recently, the Public Company Accounting Oversight Board (PCAOB) found “unacceptable” deficiencies in the audits of US-listed Chinese companies conducted in mainland China and Hong Kong. Several Chinese companies listed in the US have switched to US and Singaporean auditors to lower their delisting risk.
According to data from the Securities and Exchange Commission (SEC), 174 US-listed Chinese companies were identified for auditing inspection, 24 of which changed their auditors in 2022. 16 companies are currently under audit by US or Singapore firms, reducing the number of companies using mainland Chinese or Hong Kong accounting firms from 22 to 8.
The Chinese Securities Regulatory Commission stated that it is willing to work with its American counterparts to promote audit supervision cooperation jointly and legally protect global investors’ legitimate rights and interests.
As the crisis relieves, some fund managers maintain or even increase their stakes in Chinese companies. This begs the question: Is the best yet to come for Chinese tech stocks? The future is as unpredictable as it is exciting, but as we’ve seen from the giants who gamble on these stocks, the game is far from over. Amid fluctuating trade dynamics, regulatory shifts, and global market turbulence, the search for secure and promising prospects remains challenging.