May 12, 2022

In recent days, I’ve spoken to about half a dozen investors in Hong Kong and New York who blame the US Securities and Exchange Commission for the recent selloff in China’s technology companies. They say they’ve spotted a pattern: provisional delisting announcements by the Washington regulator have tended to precede a drop in the broader market. On March 10, the SEC identified the first five companies that may be kicked off New York’s stock exchanges in three years, prompting the worst selloff in US-listed Chinese companies since 2008 with jitters extending all the way to mainland China’s $9.7 trillion stock market. The agency added a second and third batch on April 21 and May 4 reversing gains from Chinese economic tsar Liu He’s vow for market stability in mid-March and the Politburo’s promise to support the healthy growth of platform companies — widely seen by analysts as the end of a government crackdown on Big Tech — in late April. China’s attempt to calm sentiment has so far failed. Is the US messing with China, whose economy is in the most precarious condition in years? As Beijing struggles to contain omicron outbreaks, financing conditions can’t improve even if the People’s Bank of China cuts interest rates. With this bear market, tech startups aren’t able to go public or even raise venture capital funding. Advertisement The timing is unfortunate. With traders in the dark on the true state of the Chinese economy and no end in sight for the country’s Covid troubles, it’s a fertile time for conspiracy theories and paranoia. But the SEC is merely starting a process that is required by the Holding Foreign Companies Account Act, which became law in December 2020. The watchdog must delist companies from US exchanges if the Public Company Accounting Oversight Board — essentially an auditor of auditors — is unable to review companies’ audits for three consecutive years. Chairman Gary Gensler is just doing his job. This process is well-understood in the marketplace. Large tech companies, such as Alibaba Group Holding Ltd., JD.com Inc, Baidu Inc. and NetEase Inc. have already found a second home in Hong Kong, allowing their current investors to keep their shares and trade on another large bourse — just in case the US and China can’t agree on auditing rules, and delistings follow. At most, the SEC is a catalyst, rather than the root cause, of recent selloffs. More likely, investors are finding any excuses to sell, now that market liquidity is shriveling and Chinese consumer tech is struggling. The Hang Seng Tech Index has dropped about 30% this year and in March touched a three-year low.But if we zoom out and look at the longer-term, China’s big internet companies have survived all sorts of mishaps, from the 2013 taper tantrum, to China’s massive capital outflow in 2016 and the Fed’s rate hikes in 2018. Rather, their share prices have a strong correlation with expected future earnings. The stock performance of Tencent Holdings Ltd., which went public in 2004, puts things into perspective. Alibaba, which listed a decade later, is another good example. Advertisement In other words, investors will back China’s Big Tech firms — geopolitics or not — as long as they can deliver profits. After all, they stayed in throughout Donald Trump’s trade war. And US-listed Chinese stocks peaked in February 2021, months after the passing of the law that threatened to kick them off US exchanges. But we are in a different world now. Analysts have been continually cutting their earnings forecasts, as China’s tight Covid-zero policy starts to bite. New York-listed electric carmaker Li Auto Inc., which kicked off the big tech’s reporting season this week, expects sales of only 6.2 billion yuan ($920 million) to 7 billion yuan in the current quarter, as much as 35% below the March quarter. So don’t blame the SEC. China’s tech stocks can’t bottom out until their earnings turn around. This reporting season, where companies discuss their outlook, will be an interesting one to watch. Advertisement