The Biden Administration has said the U.S. is in competition with China and restricted the ability of American businesses to sell high-end chip tech to China.
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BEIJING — A ban on U.S. investment in Chinese tech could drive up market volatility — but some sectors may escape untouched, Bank of America analysts said.
The White House is reportedly considering an executive order to ban U.S. investment into high-end Chinese tech, such as artificial intelligence, quantum computing, 5G and advanced semiconductors, according to a Politico report last week.
It’s unclear whether or when such a rule might take effect. The report indicated ongoing internal debate within the U.S. government.
“If there were a strict investment ban on US investors, it could create a significant supply of shares over the grace period and hence potential large volatility in the near term,” Bank of America’s Hong Kong-based research analysts said in a note Tuesday. “Potential long-term impact is less clear.”
“Though AI is quite prevalent in today’s online world, companies that don’t have a large business in external AI solutions [will] likely see a lower chance [of] being targeted by the U.S. side,” the analysts said.
“Online travel companies, pureplay game and music companies, online verticals in auto and real estate, niche eCommerce specialties, and logistics-focus eCommerce companies are some of the examples,” the Bank of America report said.
The analysts did not name specific stocks.
Chinese stocks have recently tried to rebound after a plunge in the last two years.
The country ended its stringent zero-Covid policy in December. In the second half of last year, the U.S. and China also reached an audit deal that significantly lowered the risk Chinese companies would have to delist from U.S. stock exchanges.
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Some of the U.S.-listed Chinese stocks with the largest U.S. institutional investor ownership on a percentage basis included KFC operator Yum China, livestreaming company Joyy and pharmaceutical company Zai Lab, according to a Jan. 25 Morgan Stanley report.
Semiconductor industry company Daqo New Energy had nearly 27% U.S. institutional ownership, Morgan Stanley said.
The data showed Alibaba had the most U.S. institutional ownership by dollar value, but it only accounted for 8.2% of the stock.
In a separate report Monday, Morgan Stanley equity strategist Laura Wang pointed out the Biden administration has focused on targeting tech with ties to the Chinese military.
She noted signs of stabilization in the U.S.-China relationship, including U.S. Secretary of State Antony Blinken’s planned visit to Beijing in the coming days and the potential for Chinese President Xi Jinping to visit the U.S. during the Asia-Pacific Economic Cooperation Leaders’ Summit — set to be held in San Francisco in November.
The White House and China’s Ministry of Foreign Affairs did not immediately respond to a request for comment on the Politico report.
— CNBC’s Michael Bloom contributed to this report.
Chinese e-commerce giant Alibaba was one of the 100 over companies that had faced the risk of delisting in the U.S. in 2024 if their audit information was not made available to PCAOB inspectors.
Investors could regain the confidence to put their money in Chinese tech stocks as these companies avoid delisting from U.S. stock exchanges and the Chinese government pledges policy support, according to one investment manager.
Last week, U.S. accounting watchdog the Public Company Accounting Oversight Board said it gained full access to inspect and investigate Chinese companies for the first time, after China finally granted the U.S. access in August.
More than 100 Chinese tech companies such as Alibaba, Baidu and JD.com had faced the risk of delisting in the U.S. in 2024 if their audit information was not made available to PCAOB inspectors.
Investors often grapple with a lack of transparency into Chinese stocks.
“It will allow institutional investors to come back. Professional investors were very scared about this delisting risk which was why they have stayed on the sidelines,” Brendan Ahern, chief investment officer at U.S.-based investment manager KraneShares, told CNBC’s “Squawk Box Asia” on Wednesday.
As of Sept. 30, there were 262 Chinese companies listed on U.S. exchanges with a total market capitalization of $775 billion, according to the United States-China Economic and Security Review Commission.
“With that risk going away based on the PCAOB announcement, you are going to see investment dollars flow back into these names,” said Ahern.
“These internet giants are really where investors want to invest when it comes to China,” said Ahern.
But he also caveated that it is still “early days, weeks, months to see that capital return back into the space.”
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But he also noted policy support will help to boost growth for these companies. Last week, China pledged to raise domestic consumption next year, as the country moves toward boosting growth after exiting its zero-Covid policy.
“2023 is a year where we are going to have a lot of government policy support such as raising domestic consumption,” said Ahern. “About 25% of all retail sales goes through the companies.”
“The Chinese government actually needs these internet companies, which explains why we have seen a backing off on some of the regulatory scrutiny we experienced in 2021,” said Ahern.
Check out the companies making the biggest moves midday.
Walmart — Shares of retailer Walmart jumped more than 7% after reporting quarterly earnings that beat Wall Street’s expectations and raising its forward guidance. The company reported adjusted earnings per share of $1.50 on $152.81 billion in revenue, where analysts expected adjusted earnings per share of $1.32 and $147.75 billion in revenue, per Refinitiv.
Retail stocks — Retail stocks rose following Walmart and Home Depot‘s stronger-than-expected financial reports for the third quarter. Home Depot rose 1%, while Target shares rallied more than 3%. Kohl’s and Bed Bath & Beyond added roughly 3%. Macy’s and Nordstrom advanced about 5% and 3%, respectively.
Taiwan Semiconductor — Shares of the Taiwanese chipmaker soared more than 12% after Warren Buffett’s Berkshire Hathaway built a $4 billion new stake in the company. Berkshire added more than 60 million shares of the Taiwanese chipmaker’s American depositary receipts, by the end of the third quarter, making Taiwan Semi the conglomerate’s 10th biggest holding at the end of September.
Paramount Global — Shares of the media company jumped more than 9% after a filing revealed that Berkshire Hathaway increased its holding to $1.7 billion at the end of the third quarter. Paramount is still down more than 30% this year as it suffered from cord cutting and a drop in advertising revenue.
Louisiana-Pacific — The lumber maker saw its stock jump more than 10% after Omaha-based Berkshire took new positions in the company last quarter. The conglomerate’s stake was worth $297 million at the end of September.
Bath & Body Works — Bath and Body Works rose 4% after an SEC filing revealed that Dan Loeb’s Third Point bought $265 million in the retailer’s stock in the third quarter.
Netflix — The streaming giant added 3.8% after Bank of America double-upgraded the stock to a buy from underperform. He said the new ad tier and crackdown on password sharing could help the stock’s value increase 23.6%.
Fulcrum Therapeutics — Shares of the biotechnology company gained 8.6% after Goldman Sachs initiated coverage of the stock as a buy and said it could see an upside of 61.5% if its main experimental drugs kept performing well.
Vodafone — Vodafone’s stock dropped 6.8% after the company cut its earnings guidance and cash flow forecast. The mobile operator cited a challenging economic environment.
Getty Images — Getty Images’ stock plummeted 12% after revenue for the recent quarter missed Wall Street’s expectations.
Albemarle — Shares of the lithium miner dropped 6%. Rumors that an unnamed Chinese cathode manufacturer was cutting its production targets was putting pressure on U.S. lithium stocks, according to FactSet.
Signature Bank — Shares of the crypto bank jumped more than 10% after Signature reported minimal exposure to FTX and any potential destruction that could come from its collapse. Signature said it has only a deposit relationship with the exchange — it does not lend crypto or invest in it on behalf of clients — representing less than 0.1% of its overall deposits.
Mobileye Global — The autonomous vehicle systems software company rallied 4% after Baird initiated coverage of the stock with an outperform rating. Analyst Luke Junk called Mobileye a market leader, writing, “Net, we recommend purchase/would lean into any volatility, for this premier franchise/longer-term optionality.”
Sunnova Energy — Shares of solar company rose 7.5% after Deutsche Bank initiated coverage of Sunnova Energy, First Solar and Enphase Energy with buy ratings. First Solar was up 3.2%, and Enphase Energy rose 2%.
Capital One Financial — The regional bank’s stock sank 5% after it was downgraded by Bank of America to neutral from buy. Analyst Mihir Bhatia also cut his price target to $113 per share from $124.
Carnival — Shares of the cruise operator rose 6% after another report hinted inflation could be slowing. Royal Caribbean Cruises and Norwegian Cruise Line were also higher, up 4.9% and 2.5% respectively.
Chinese stocks — Chinese companies listed on the U.S. stock market rose following President Joe Biden’s meeting with China President Xi Jinping and despite disappointing retail sales data. Tencent Music Entertainment, which also posted beats on the top and bottom lines,soared about 30%. Alibaba rose roughly 12%. Pinduoduo and Baidu both rallied about 10%, and JD.com rose nearly 8%.
— CNBC’s Yun Li, Carmen Reinicke, Alex Harring, Samantha Subin and Tanaya Macheel contributed reporting.
Li Qiang, likely to become the next premier, is pictured here speaking at a major annual financial conference in Shanghai in 2020.
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BEIJING — Chinese stocks’ plunge on Monday over fears about China’s new leadership team “may be misguided,” consulting firm Teneo said.
Chinese stocks in Hong Kong and New York, especially internet tech giants such as Alibaba, dropped on the first trading day after Chinese President Xi Jinping cemented his firm grip on power with a new core leadership team filled with his loyalists.
Over the last several years, Xi has shown a preference for greater state involvement in the economy.
“Close relationships with Xi notwithstanding, Li Qiang, Li Xi, and Cai Qi all enter the [Politburo standing committee] after heading up rich provinces where economic growth is still the top priority,” Teneo Managing Director Gabriel Wildau and a team said in a note.
Xi’s leadership team
The Politburo standing committee is the highest circle of power in China.
Li Xi has led the export-heavy province of Guangdong as party secretary, while Cai Qi held the role for the capital city of Beijing.
Mr Li [Qiang] has been widely regarded as a capable pro-market and pro-growth politician.
Ting Lu
chief China economist, Nomura
Li Qiang, likely to become the next premier, oversaw stringent Covid lockdowns in Shanghai this year in his role as party secretary of the city.
However, analysts such as Nomura’s Chief China Economist Ting Lu pointed out that Li Qiang “has extensive experience in managing some of China’s richest and biggest provincial economies” — Zhejiang, Jiangsu and Shanghai.
“Mr Li has been widely regarded as a capable pro-market and pro-growth politician,” the Nomura report said.
“Mr Li suffered some setbacks during the Omicron wave in spring this year, when the entire city of Shanghai was put under a restrictive full lockdown. However, during most of 2020 and 2021, Shanghai under Mr Li’s governorship was perceived as a role model for achieving a reasonable balance between Covid containment and economic growth.”
Analysts also pointed out the promotions of He Lifeng, head of the National Development and Reform Commission, and securities regulator head Yi Huiman.
He Lifeng will likely “succeed the retiring Liu He as vice premier and director of the party’s Central Financial and Economic Affairs Commission,” Teneo analysts said.
In our view, the completion of the [party congress] will enable the top leadership to move on to the next policy agenda soon — relaxing the Covid curbs.
“Though He lacks Liu’s technocratic expertise, He’s record also suggests a strong focus on economic growth,” the report said. “In an article last year, He wrote that economic development was the ‘number one task’ and the foundation and key to solving all our country’s problems.'”
Xi’s speech at the opening of the Chinese Communist Party’s 20th National Congress this month emphasized that China will focus on “high-quality development” and “modernization” in the coming years.
Common prosperity — moderate wealth for all, rather than just a few — is a requirement for that modernization, Xi said.
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Analysts have said China’s renewed pursuit of common prosperity contributed to Beijing’s recent crackdown on internet tech giants.
Chinese officials have signaled that the crackdown is nearing an end. In July, a Politburo meeting readout said officials called for the continued “healthy” development of the “platform economy” and “completing” the businesses’ adjustments.
China’s Covid policy
The party congress that ended over the weekend did not signal whether China’s stringent Covid controls would be changed soon. The restrictions on business activity have weighed on economic growth.
However, Bank of America China and Asia Economist Helen Qiao and a team said in a note Monday that Covid policy changes could happen sooner than the market expects.
“In our view, the completion of the [party congress] will enable the top leadership to move on to the next policy agenda soon — relaxing the Covid curbs,” the report said.
The analysts said some might worry about the new group of leaders’ lack of checks and balances, and the risk of policy mistakes that shock the economy.
But they added that the group’s solidarity “may lead to more effective policy execution” for the country overall.
— CNBC’s Michael Bloom contributed to this report.
Chinese President Xi Jinping proposing a toast at the welcome banquet for leaders attending the Belt and Road Forum at the Great Hall of the People on April 26, 2019 in Beijing, China.
Nicolas Asfouri | Getty Images
Xi Jinping once declared China should “prioritize innovation” and be on the “cutting-edge (of) frontier technologies, modern engineering technologies, and disruptive technologies.”
Since that speech in 2017, Beijing has spoken about technologies it wants to boost its prowess in, ranging from artificial intelligence to 5G technology and semiconductors.
Five years since Xi’s address at the Communist Party of China’s last National Congress, the global reality for the world’s second-largest economy has transformed. It comes amid an ongoing trade war with the U.S., challenges from Covid and a change in political direction at home that have hurt some of Beijing’s goals.
On Sunday, the 20th National Congress — held once every five years — will begin in Beijing. The high-level meeting is expected to pave the way for Xi to carry on as head of the Communist Party for an unprecedented third five-year term.
Xi will take stock of China’s achievements in science and technology, which have yielded mixed results.
“I agree it is a mixed bag,” Charles Mok, visiting scholar at the Global Digital Policy Incubator at Stanford University.
He said China sets “lofty” goals as it targets to be the best, but “they are limited politically and ideologically in terms of the strategies to reach them.”
Private tech enterprises are faltering under stricter regulation and a slowing economy. China is far from self-sufficient in semiconductors, a task made harder by recent U.S. export controls. Censorship on the mainland has tightened as well.
But China has made some notable advancements in areas such as 5G and space travel.
U.S.-China tech war
“It would seem that Xi underestimated the challenges China faced in overcoming its reliance on foreign, mostly U.S. firms…”
Paul Triolo
technology policy lead, Albright Stonebridge
Zero Covid
Semiconductor self-sufficiency
Beijing put a lot of focus on self-sufficiency in various areas of technology, but especially on semiconductors. The drive to boost China’s domestic chip industry was given further impetus as the trade war began.
In its its five-year development plan, the 14th of its kind, Beijing said it would make “science and technology self-reliance and self-improvement a strategic pillar for national development.”
One area it hoped to do so was in semiconductors.
But a number of restrictions by the U.S. has put a dent in those ambitions.
“It would seem that Xi underestimated the challenges China faced in overcoming its reliance on foreign, mostly U.S. firms, in key ‘core’ or ‘hard’ technologies such as semiconductors,” Paul Triolo, the technology policy lead at consulting firm Albright Stonebridge, told CNBC.
“He also did not account for growing U.S. concern over semiconductors as foundational to key technologies.”
Looking ahead, the latest package of U.S. controls will make a huge dent in China’s technology ambitions.
Paul Triolo
technology policy lead, Albright Stonebridge
Things did not look as “bleak” for China’s semiconductors in 2017 as they do now, Triolo said.
“Looking back, Xi should have redoubled efforts to bolster China’s domestic semiconductor manufacturing equipment sector, but even there, a heavy reliance on inputs such as semiconductors has made it difficult for Chinese firms to reproduce all elements of those complex supply chains.”
The Biden administration unveiled a slew of restrictions last week that aim to cut China off from key chips and manufacturing tools to make those semiconductors. Washington is looking to choke off supply of chips for critical technology areas like artificial intelligence and supercomputing.
Analysts previously told CNBC that this will likely hobble China’s domestic technology industry.
That’s because part of the rules also require certain foreign-made chips that use American tools and software in the design and manufacturing process, to obtain a license before being exported to China.
Chinese domestic chipmakers and design companies still rely heavily on American tools.
Chipmakers — like Taiwanese firm TSMC, the most advanced semiconductor manufacturer in the world —are also dependent on U.S. technology. That means any Chinese company relying on TSMC may be cut off from supply of chips.
Meanwhile, China does not have any domestic equivalent of TSMC. China’s leading chip manufacturer, SMIC, is still generations behind TSMC in its technology. And with the latest U.S. restrictions, it could make it difficult for SMIC to catch up.
So China is still a long way from self-sufficiency in semiconductors, even though Beijing is focusing heavily on it.
“Looking ahead, the latest package of U.S. controls will make a huge dent in China’s technology ambitions, because the curbs on advances semiconductors,” Triolo said. The curbs will “ripple across multiple associated sectors, and make it impossible for Chinese firms to compete in some areas, such as high performance computers, and AI related applications such as autonomous vehicles, that rely on hardware advances to make progress.”
China’s tech crackdown
A major hallmark of Xi’s last five years is how he has transformed China into one of the strictest regulatory regimes globally for technology.
Over the last two years, China’s once free-wheeling and fast-growing tech giants have come under heavy scrutiny.
It began in November 2020 when the $34.5 billion initial public offering of Ant Group, which would have been the biggest in the world, was pulled by regulators.
That sparked several months where regulators moved swiftly to introduce a slew of regulation in areas from antitrust to data protection.
In one of the first regulations of its kind globally, Beijing also passed a law which regulated how tech firms can use recommendation algorithms, underscoring the intense tightening that took place.
Looking back to Xi’s 2017 speech, there were hints that regulation was coming.
“We will provide more and better online content and put in place a system for integrated internet management to ensure a clean cyberspace,” Xi said at that time.
But the pace at which regulations were passed and the scope of the rules took investors off guard, and billions were wiped off the share prices of China’s biggest tech companies — including Alibaba and Tencent — in 2021 and 2022. They have yet to recover from those losses.
Analysts pointed out that even though there were mentions about cleaning up the internet, the swift nature of regulation that subsequently swept across China was unlikely to have been anticipated — even by Xi himself.
“While I believe that in 2017, Xi had absolutely become focused on strengthening platform regulation, I very much doubt that the rapid-fire nature of… [the regulation] was pre-planned,” Kendra Schaefer, partner at Trivium China consultancy, told CNBC.
Five years ago, Xi said the government would “do away with regulations and practices that impede the development of a unified market and fair competition, support the growth of private businesses, and stimulate the vitality of various market entities.”
This is another pledge that appears not to have been met. China’s technology giants are also posting their slowest growth in history, partly due to tighter regulations. Part of the story, analysts say, is about Xi exerting more control over powerful technology businesses that were perceived as a threat to the ruling Communist Party of China.
“It is obvious that they are not supporting the growth of private businesses,” Mok said. “In my view, they have not succeeded.”
“Think of it that they are putting the Party agenda and total control as the top priority … No one can be successful unless the Party is successful in sustaining its dominance and total control.”
China’s successes from 5G to space
Despite the challenges, China has found success in the realm of science and technology since 2017. Space exploration has been a key focus.
In 2020, a Chinese moon mission concluded with its spacecraft returning back to Earth with lunar samples, a first for the country. That same year, China completed its own satellite navigation system called Beidou, a rival to the U.S.-government owned Global Positioning System (GPS).
Last year, China landed an un-crewed spacecraft on Mars and is planning its first crewed mission to the Red Planet in 2033.
China was also one of the leading nations globally to roll out next-generation 5G mobile networks, which promise super-fast speeds and the ability to support new industries like autonomous driving.
In electric vehicles, China has also pushed ahead. The country is the largest electric car market in the world and home to CATL, the world’s largest EV battery maker, which is looking to expanding overseas.
What next for Xi’s tech policy?
The regulatory assault on the domestic technology sector, which has slowed in recent months, will not go away entirely.
Even if regulatory actions are “moving into a new phase” in Xi’s third term, companies like Alibaba and Tencent won’t necessarily see the breakneck growth speeds they’ve seen in the past, Mok said.
“Even if they find their feet, it is not the same ground. They won’t see that growth, because if China’s overall GDP and economy growth is like what people are talking about now for the next several years … then why should they even outperform the whole China market?” Mok said.
Without a doubt, technology will continue to be a key focus for Xi over the coming five years, with a focus on self-sufficiency. China will likely continue to strive for success in areas Beijing deems as “frontier” technologies such as artificial intelligence and chips.
But Xi’s job in tech is now that much harder.
“As the U.S. continues to ratchet up controls in other areas of technology, and squeeze technology investments in China via outbound investment reviews, the overall innovation engine in China, heretofore driven by the private sector, will also begin to sputter, and the government will have to increasingly step in with funding,” Triolo said.
“This is not necessarily a recipe for success, except for manufacturing heavy sectors, but not for advanced semiconductors, software, and AI.”
Avoiding the Chinese market is “crazy” and “makes no sense whatsoever” in light of how cheap Chinese stocks are right now, said Kevin O’Leary of O’Shares Investments.
According to him, that’s thanks to these factors: the projected size of China’s economic growth; a foreseeable end to regulatory disputes with the United States; and the interdependency of both economies.
“There’s an economic war, technology war, regulation war going on with the United States — that too could be temporary,” he said. “But frankly, these economies need each other, so to have no allocation to Chinese markets, makes no sense whatsoever.”
“To have no allocation to the world’s fastest-growing economy … is crazy,” he said. “You’ve got to stomach volatility.”
Chinese shares dropped sharply on Wednesday after indexes on Wall Street plunged following a higher-than-expected U.S. consumer price index report for August.
China to become ‘largest economy’
Nevertheless, O’Leary said there’s “no question [that] the Chinese economy, over the next 20 to 25 years, is going to become the largest economy on earth,” adding that “There’s no stopping that and no denying it.”
He acknowledged that there are many political issues surrounding Chinese stocks, but described them as “noise.”
“I own China stocks. I have an index of them, particularly global internet behemoths, large companies like Alibaba,” he said.
“If you own Amazon, why don’t you own Baba — The same idea. The Chinese are using online services the same way — Tencent, others, they’re there because [their] consumers are demanding it.”
The U.S. and China have taken a significant first step toward keeping U.S.-listed Chinese stocks like Alibaba from being forced off U.S. stock exchanges.
Holger Gogolin | iStock | Getty Images
BEIJING — The U.S. and China recently took a significant first step toward keeping U.S.-listed Chinese stocks like Alibaba from being forced off U.S. stock exchanges.
What needs to happen next is a smooth on-ground inspection in China by the U.S. with adequate support from Chinese authorities, analysts said.
“Many implementation details probably can only be figured out by the auditing firms and the [Ministry of Finance] — together with [the China Securities Regulatory Commission] — through real-case auditing trials under this unprecedented agreement,” said Winston Ma, adjunct professor of law at New York University.
The U.S. Public Company Accounting Oversight Board said its inspectors are set to arrive in Hong Kong in mid-September, shortly after which “all audit work papers requested by the PCAOB must be made available to them.”
Audit work papers differ from the actual information on companies gathered by accounting firms.
The work papers record the audit procedure, tests, gathered information and conclusions about the review, according to the PCAOB website. It is not clear what level of highly sensitive information, if any, would be included in the work papers.
The ability of the U.S. to inspect those work papers for Chinese companies listed in the U.S. has been a years-long dispute. U.S. political and legal developments in the last two years have sped up the threat that the Chinese companies might need to delist from U.S. stock exchanges.
A turning point came in late August when the PCAOB and China Securities Regulatory Commission signed a cooperation agreement that laid the regulatory basis for allowing U.S. inspections of audit firms within China’s borders.
That’s according to statements from both government entities, which also said China’s Ministry of Finance signed the deal.
“I see this as a big ‘progress,’ meaning that both sides were willing to take steps to move this forward,” said Stephanie Tang, head of private equity for Greater China and partner at Hogan Lovells.
“The subject or the audience of this PCAOB investigation would be the audit firms,” she said, emphasizing she is not an accountant.
Need for more implementation clarity
China’s registered accounting firms are overseen by the the Ministry of Finance, making it the leader on the Chinese side of next steps, said Ming Liao, founding partner of Beijing-based Prospect Avenue Capital.
However, there’s uncertainty around implementation of the agreement as it only established a framework, analysts said.
“Our accounting firms still don’t know how to proceed,” said Peter Tsui, president of the Hong Kong-based Association of Chinese Internal Auditors. That’s according to a CNBC translation of his Mandarin-language remarks Thursday.
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He said questions remain over what information the firms should share in order to remain compliant with Chinese regulation.
“Give [us] some guidelines,” Tsui said.
Tsui said the inspections should go smoothly if it’s just a matter of accountants on both sides, and there is no political interference on the U.S. side. He said the big four accounting firms — KPMG, PwC, Deloitte and EY — are members of the association.
China’s Ministry of Finance has yet to release a public statement on the audit cooperation agreement. The ministry did not immediately respond to a CNBC request for comment.
One development Prospect Avenue Capital’s Liao is watching is whether U.S. President Joe Biden and Chinese President Xi Jinping meet in-person this fall for the first time under the Biden administration. That could speed up a final agreement on the audit dispute, he said.
“In the end, resolving the audit work paper problem relies on political interaction between China and the U.S.,” Liao said in Chinese, according to a CNBC translation. “With trust, this problem can very easily be resolved.”
A decision by the year’s end
The PCAOB said it will make a determination in December on whether China was still obstructing access to audit information.
U.S. regulators will likely “start to know in October or November” what determination the PCAOB will make on whether U.S.-listed Chinese companies might be headed for delisting, Gary Gensler, chair of the U.S. Securities and Exchange Commission, told CNBC’s David Faber in late August.
Alibaba and many other U.S.-listed Chinese companies have started in the last few years to issue shares in Hong Kong — partly seen as a way to hedge against a potential delisting from U.S. stock exchanges. Since Chinese ride-hailing company Didi’s U.S. IPO in the summer of 2021, Beijing has also increased its scrutiny of Chinese companies wanting to list overseas.
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The combined political uncertainty has slowed the flow of Chinese IPOs in the U.S., especially of larger companies.
Since July 1, 2021, 16 Chinese companies have listed in the U.S., excluding special-purpose acquisition companies, according to Renaissance Capital. Back in 2020, 30 China-based companies had listed in the U.S., the firm said then.
By value, the five largest U.S. institutional holdings of U.S.-listed Chinese stocks are: Alibaba, JD.com, Pinduoduo, NetEase and Baidu. That’s according to Morgan Stanley research dated Aug. 26.
The China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board announced Friday both sides signed an agreement for cooperation on inspecting the audit work papers of U.S.- listed Chinese companies. Pictured here is the CSRC building in Beijing in 2020.
Emmanuel Wong | Getty Images News | Getty Images
BEIJING — The risk of Chinese stocks delisting from U.S. exchanges has nearly halved after regulators reached an audit agreement, Goldman Sachs analysts said in a report Monday.
The China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board announced Friday that both sides signed an agreement for cooperation on inspecting the audit work papers of U.S.- listed Chinese companies. China’s Ministry of Finance also signed the agreement.
“This is no doubt a regulatory breakthrough,” Goldman Sachs’ Kinger Lau and a team said, while cautioning that much uncertainty remains.
They pointed out the PCAOB said the deal was only a first step, while the Chinese side said they would provide “assistance” in the inspections.
The PCAOB said it planned to have inspectors on the ground in China by mid-September, and make a determination in December on whether China was still obstructing access to audit information.
The Goldman Sachs analysts said Monday their model “suggests that the market may be pricing in around 50% probability” that Chinese companies could be delisted from the U.S.
That’s down from 95% in mid-March — the highest on record going back to January 2020.
In late 2020, the U.S. Holding Foreign Companies Accountable Act became law. It allows the U.S. Securities and Exchange Commission to delist Chinese companies from U.S. exchanges if American regulators cannot review company audits for three consecutive years.
Since March, the SEC has started to call out Alibaba and other specific U.S.-listed Chinese stocks for failing to adhere to the new law.
Outlook for China stocks
If U.S.-listed Chinese stocks, known as American depositary receipts, are forced to delist, the shares could plunge by 13%, the Goldman Sachs analysts estimated.
MSCI China could fall by 6% under such a scenario, the report said. The index’s top holdings are Chinese stocks listed mostly in Hong Kong, such as Tencent and Alibaba.
A “no-delisting” scenario could send ADRs and MSCI China 11% and 5% higher, respectively, the report said.
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Few China-based companies have listed in the U.S. following Beijing’s scrutiny of Chinese ride-hailing company Didi’s IPO in late June 2021. Regulators have since tightened restrictions on Chinese companies — especially those with at least 1 million users — wanting to list overseas.
Tencent runs the ubiquitous Chinese messaging app WeChat. The company has a short form video feature with in the app and has began to monetize that through video ads in the feed. Tencent said such ads could become a “substantial” source of revenue in the future.
Tencent said advertising in its nascent short video platform could become a “substantial” revenue source in the future, even as other areas of its business — such as gaming — face pressure.
The focus on this advertising product from one of China’s biggest technology giant puts it in direct competition with the country’s two leading short video players: ByteDance’s Douyin, the Chinese cousin of TikTok as well as Kuaishou.
On Wednesday, Tencent reported its first ever year-on-year quarterly revenue decline as its gaming business faced headwinds. Tighter tech regulation, Covid’s resurgence and the subsequent economic weakness in China weighed on the overall company.
Tencent runs China’s most popular messaging app called WeChat which has over one billion users. There is a short video platform built within WeChat. Users can scroll through different videos. In July, Tencent for the first time began serving ads to users in that service it calls video accounts.
The company said it will release more video ad inventory this month.
Video ads will eventually grow into a substantial revenue source for us over time.
Martin Lau
President, Tencent
On Wednesday, Tencent spent a large part of the opening of the earnings call explaining the potential of video ads, underscoring how important the revenue stream could be.
“Video accounts has become one of the most popular short video services in China with substantial user engagement,” Martin Lau, president of Tencent, told analysts.
“Strategically, they allow us to expand our ad market share. As advertisers have already been spending aggressively on multiple short-form video platforms, we should be able to capture more advertising budgets.”
Lau said it took five quarters for WeChat Moments, a social feature where users can post pictures, videos and status updates, to reach 1 billion yuan ($147.42 million) in quarterly advertising revenue. He said that Video accounts will reach that goal more quickly given the “current size of traffic and already strong advertiser demand for short form video ads.”
“Video ads will eventually grow into a substantial revenue source for us over time,” Lau said.
Tencent’s online ad revenue in the second quarter fell 18% year-on-year to 18.6 billion Chinese yuan as macroeconomic issues in China led to brands cutting budgets.
The Shenzhen-headquartered company is hoping video ads can help boost the division over the coming quarters.
Competition rises
Tencent’s foray into short video is relatively new and it it is now looking to step up the challenge to TikTok’s Chinese version Douyin as well as Kuaishou.
The market potential could be big.
Revenue from short form video accounts for around 39% of China’s total digital ad revenue, according to data from QuestMobile. It is the biggest single ad revenue category ahead of categories like social networking and news.
Many of China’s technology giants have turned toward short video and livestreaming to unlock new revenue streams.
James Mitchell, Tencent’s chief strategy officer said the revenue potential “per minute of time spent” on video accounts will be higher than Moments.
Companies like Alibaba have tried to use livestreaming and short-form video as a way of generating sales on its e-commerce platform. An influencer might advertise products via video and users can click items in the video to buy.
When asked by one analyst if Tencent will move in this direction, Lau said e-commerce livestreaming is an “opportunity” but it “will take some time.”
Lau said Tencent will need to build up awareness of the video product, then onboard merchants and advertisers.
“We will try to do it on a stage-by-stage basis,” Lau said, referring to the development of video accounts.
China has introduced rules that aim to govern how technology platforms use recommendation algorithms. It is part of a broader push from Beijing to more closely regulate China’s domestic technology sector.
Thomas White | Reuters
Chinese technology giants shared details of their prized algorithms with the country’s regulators in an unprecedented move, as Beijing looks for more oversight over its domestic internet sector.
The Cyberspace Administration of China, one of the country’s most powerful regulators, released a list on Friday of 30 algorithms alongside a brief description of their purpose from companies including e-commerce firm Alibaba and gaming giant Tencent.
It comes after China brought in a law in March governing the way tech firms use recommendation algorithms. The rules include allowing users to opt out of recommendation algorithms, as well as requiring companies to obtain a license to provide news services.
Algorithms are the secret sauce behind the success of many of China’s technology companies. They can be used to target users with products or videos based on information about that customer.
But during the past nearly two years, Beijing has tightened regulation on China’s technology sector in areas from data protection to antitrust in a bid to rein in the power of the country’s giants that have grown, largely unencumbered, over a few years.
The March law also requires companies to file details of the algorithms with the cyberspace regulator.
Details are thin in the public filing. For example, the algorithm made by ByteDance for Douyin, the Chinese version of TikTok, is used for recommending graphics, videos, products and services that may be of interest to users through behavioral data such as clicks and likes, according to the CAC filing.
The algorithm for Taobao, Alibaba’s Chinese marketplace, is used for content recommendation on the homepage and other parts of the app through a user’s historical search data, the filing says.
While the public filing from the CAC keeps things brief, it’s unclear how much insight the regulator had into the inner workings behind the algorithms from the technology companies.
CNBC has reached out to Alibaba, Tencent, Baidu, ByteDance and NetEase for comment.
China’s move to create a registration system for algorithms is unprecedented. The U.S. and European Union have yet to introduce anything like the law seen in China, although European lawmakers are currently debating rules around the use of artificial intelligence.
