Stock prices of Baidu, Alibaba, and iQIYI have plummeted today.
The Holding Foreign Companies Accountable Act (HFCAA) of 2020, a law that mandates foreign companies listed on U.S. exchanges to allow the U.S. Public Company Accounting Oversight Board (PCAOB) to inspect their auditing firms, is causing a stir in the tech industry. The SEC has added five more China-based companies to its list of stocks at risk of delisting over disclosure concerns, including iQIYI, Baidu, and Futu Holdings.
The affected companies also include Alibaba Group Holding Limited, a prominent e-commerce powerhouse, and iQIYI, an internet streaming giant. Baidu, China's biggest search engine, and Futu Holdings, an online stock broker, are also on the list. The SEC publishes a list of companies at risk of delisting before delisting to give investors and market participants notice.
Investors are selling Chinese stocks en masse today, in part due to the addition of Baidu, iQIYI, and Futu to the SEC's list. As of 10:30 a.m. ET, iQIYI stock is down 8.5%, Baidu is down 7%, and Futu Holdings is down 9.7%. Alibaba stock is also off 4.7% during the same period.
The reasons for this delisting threat lie in the regulatory conflicts between China and the United States. China does not allow audit and accounting data to be taken offshore, interfering with Chinese companies' ability to comply with the HFCAA law. This has resulted in non-compliance, triggering delisting threats for companies like Alibaba and Baidu.
To mitigate these delisting risks, many large Chinese companies, including Alibaba, have sought secondary or dual listings in the Hong Kong Stock Exchange (HKEX). This offers a "safety cushion" by allowing these companies to maintain public trading access outside the U.S. market, which is viewed as a more flexible and accessible listing venue under current geopolitical and regulatory tensions.
The broader geopolitical environment, including trade tensions and deteriorating U.S.-China relations, exacerbate investor concerns over delisting risks. Institutional investors like Bridgewater Associates have sold all their U.S.-listed Chinese stock holdings amid these uncertainties.
However, there's still hope that these companies may eventually be able to get off the SEC's list, despite being added today. A new approach is being considered, where China's finance ministry vets the audit data for state secrets and personal information before handing it over for review by U.S. auditors. The Chinese government is working to find a mechanism to comply with overseas accounting regulations.
This regulatory friction is reshaping how Chinese tech giants manage their U.S. listings and investor strategies worldwide.
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