You may have noticed recent media articles regarding U.S.-listed Chinese stocks, a.k.a. Chinese ADRs, that had a negative impact on share prices.
Let me explain why.
In the midst of Congress taking a more confrontational attitude towards China, Senator Marco Rubio has been advocating and has introduced legislation calling for stronger investment restraints and greater scrutiny for Chinese companies listed on U.S. exchanges (known as Chinese ADRs, or American Depositary Receipts) as well as Chinese stocks in stock indexes and U.S. pension funds.
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Operating revenue increased over 70%.
Gross profit surged 122%.
Net income was up over 60%.
One issue is that some Chinese companies have apparently not been complying with PCAOB (Public Company Accounting Oversight Board) standards.
There are 156 Chinese companies, including at least 11 state-owned firms, listed on the three largest U.S. exchanges—the NASDAQ, New York Stock Exchange and NYSE American—according to a report by the U.S.-China Economic and Security Review Commission.
I have been aware of the Rubio legislation, but what escalated matters considerably were reports that the Trump Administration is going well beyond these accounting concerns by discussing ways to limit U.S. investors’ portfolio flows into China.
Among the options the Trump administration is apparently considering are delisting some Chinese ADRs from U.S. stock exchanges and limiting Americans’ exposure to the Chinese market through government pension funds.
This may all be talk and come to nothing in the end but, at a minimum, this noise is another headwind for Chinese stocks.
Let me make a few points by explaining how I’m handling it in the portfolio of my Cabot Global Stocks Explorer advisory.
First, I avoid on principle Chinese state-owned stocks, which would naturally be the first target of any legislation.
Second, we have a diversified portfolio with four Chinese stocks. To learn their names, click here. But I will tell you this: none of these stocks have any regulatory issues related to the Rubio proposed legislation, though the hubbub surrounding it and President Trump’s not-so-veiled threats to ban Chinese stocks from U.S. exchanges has pushed Chinese ADRs down a bit further.
Here is a link to a report that, while a bit dated, has a list of the Chinese companies listed on U.S. exchanges with companies that were out of compliance with the PCAOB highlighted.
These developments will likely result in the market unnecessarily punishing a number of quality Chinese companies that fully meet the highest standards. At lower prices, that will make them prime buying opportunities. And thus, ripe for recommendation in my Cabot Global Stocks Explorer advisory.
*Editor’s Note: This post was excerpted from the latest issue of Cabot Global Stocks Explorer.