“China bars foreign access to audit works of certain overseas-listed companies, citing national security concerns”— Paul Ebeling
The US Senate has passed a bill to delist Chinese firms from exchanges and Friday, Morgan Stanley (NYSE:MS) cautioned against exposure to US-listed Chinese tech firms after the US accounting watchdog moved a step closer to removing non-compliant Chinese companies from American exchanges.
Thursday the Public Company Accounting Oversight Board (PCAOB) proposed a new rule that signals steady implementation of steps to delist US-listed Chinese companies whose audit work paper cannot be accessed by the PCAOB.
In a research report to clients, Morgan Stanley said that the move is negative to Chinese American Depositary Receipts (ADRs) that are already suffering from Beijing’s tighter internet regulations, and concerns of rising inflation, which bodes ill for growth stocks.
“We believe this is negative for those stocks affected and would recommend hedging strategy,” Morgan Stanley wrote.
The PCAOB proposal signals the Holding Foreign Companies Accountable Act (HFCAA), aimed at delisting non-compliant foreign companies listed in the US, “is being implemented steadily and is now closer to being fully executed,” MS wrote.
The HFCAA was signed by President Trump (45) and has gained bipartisan support.
The S&P/BNY Mellon’s China ADR Index (.BKCNC), which tracks US-listed Chinese firms including Alibaba Group Holding , JD.com and Baidu Inc , was down 10% this week, having fallen 40% since mid-February.
The sharp dive had been partly driven by China’s deepening anti-monopoly campaign, and uncertainly around rising yields amid heightened inflation expectations.
China bars foreign access to audit works of certain overseas-listed companies, citing national security concerns. China’s securities watchdog has repeatedly said it is open to discussing the issue with the PCAOB but that its proposed solution got no response from the US side.
Morgan Stanley recommended a hedging strategy, under which investors buy ADRs that are eligible for immediate Hong Kong secondary listing, while selling those ADRs that are ineligible.
Have a healthy weekend, Keep the Faith!