The Future of Chinese Stocks in U.S. Exchanges

What is the future of Chinese stocks in U.S. Exchanges?

It is no secret that China’s overall strategy is to become the main player in world economics. And, we in the U.S. shouldn’t be surprised at this ambition. China is the world’s most populous country. The stock value of Chinese companies today represents 17% of the total value of all global stocks.

What might really surprise you is the fact that China only began to participate in international stock indexes as recently as 2019! Why is that?

China had to work for over a decade to strengthen its own regulatory framework for stocks. Those internal improvements allowed China to comply with transparency and accounting requirements of major stock indexes.

So what’s all the talk about “delisting” Chinese stocks?

A new U.S. law – the Holding Foreign Companies Accountable Act – would enable a Public Company Accounting Oversight Board (PCAOB) to inspect the books of any foreign company trading in the U.S. exchanges. A foreign company’s inability or unwillingness to comply would result in that company stock being delisted, or removed, from the U.S. exchange.

As of today, companies have until 2024 to become compliant.

China has a history of refusing to allow U.S. oversight boards to examine Chinese firm audits on grounds of national security. It remains uncertain whether the 248 Chinese companies currently listed in U.S. exchanges can and will comply with the new regulation.

That level of uncertainty is causing a quick, mass shedding of U.S. investments in Chinese shares (see this op-ed piece, warning investors to “get out while you still can”).

Should I do anything about Chinese stocks now?

CSH recommends taking a long view on this matter. Why?

Both the U.S. and China have a real interest in working out a solution. It doesn’t help China’s long-term ambitions to cheat or mislead investors in the west or worldwide. And, U.S. investors want to keep the door open to continue investing in growing numbers of Chinese companies and innovations.

Folks are working on solutions even as I write this. The U.S. Securities and Exchange Commission (SEC) has proposed that U.S. auditors could validate the audits of Chinese companies listed in the U.S. exchanges. Most U.S.-listed Chinese companies are already audited by the big four accounting firms in the U.S., so an added step would not be too onerous.

Here are points to remember as we watch this issue take shape:

1. Nothing will change overnight. Even if dozens, or hundreds, of Chinese companies, were delisted from U.S. exchanges, that activity would occur over a very long period of time.

2. Any Chinese companies delisted by U.S. exchanges could still be traded in other markets, like Hong Kong. An investor with a long-term interest in China or Chinese technologies and innovations can still realize their objectives.

3. Mutual funds remain an unattractive place to invest your monies. Some are advising that you enlist a mutual fund or exchange-traded fund (ETF) manager to help you navigate the complex and changing landscape of Chinese stocks included in mutual and ETF funds. But, I’ve been guiding away from mutual fund investments for some time. (Read more about that here and here.) We will continue to make better investments in individual securities (stocks and bonds) — whether that includes Chinese stocks or not.

CSH will keep watching the horizon for you regarding Chinese stocks.

Even when taking the long view on Chinese stocks in U.S. exchanges, you may have questions today. You may be uncertain whether your investments include Chinese companies, through a mutual fund or otherwise. Or, you may be interested to explore or expand an investment strategy in Chinese companies but are uncertain what to do at this time.

CSH stands ready to serve as your navigation system for this long trip because we believe that everyone deserves a reliable financial advisor they can trust. Give us a call at 217-824-4211 if you have any questions, concerns, or we can be of help to you.

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