9 Investor Takeaways From The Crackdown On US-Listed Chinese Stocks

China’s recent crackdown on DiDi Global Inc - ADR DIDI and other U.S.-listed Chinese tech stocks has sent Chinese ADRs tumbling and has investors puzzled about what to expect next.

After four years of headwinds from President Donald Trump’s trade war with China, the Chinese Communist Party (CCP) now appears to be the biggest threat to U.S.-listed Chinese stocks.

Major Crackdown: Bank of America analyst Michael Li said a new statement by the China Securities Regulatory Commission (CSRC) indicates China will soon be revising rules on overseas listings of Chinese companies.

“We believe the major impacts would be on ADR listing in the next 6-12mths and there would also be impacts on secondary listing/conversion/PE investment/data protection,” Li said Thursday.

The changes could have implications for both new Chinese IPOs and current Chinese stocks that trade on major U.S. exchanges, such as Alibaba Group Holding Ltd - ADR BABA, Baidu Inc ADR Class A BIDU and Pinduoduo Inc - ADR PDD.

Related Link: China's Didi Crackdown: 3 Takeaways For Tesla Investors

What To Expect: In his note, Li listed nine implications from the Chinese crackdown that investors need to know:

1. Expect fewer new listings of Chinese ADRs over the next two to four quarters.
2. The new regulations on the overseas listing process for Chinese companies should be released by the end of 2021.
3. Large Chinese internet companies that have data that could be seen as a national security threat will likely face the most difficult listing challenges in the next one to three years.
4. The changes will have no near-term impact on the businesses of U.S.-listed ADRs, but it could impact how they acquire, store and share data in the medium-term.
5. Expect more Hong Kong listings and conversion of U.S.-listed Chinese ADRs to H-shares.
6. Current U.S.-listed variable interest entities (VIEs) like Alibaba and Baidu will likely not be forced to restructure their businesses, but companies may be forced to provide more information about their controlling parties.
7. The near-term uncertainty surrounding the situation may reduce or delay U.S. private equity investment in Chinese companies if PE firms are concerned about their ability to exit their positions.
8. Stocks trading on the Hong Kong Exchange will be less impacted than those trading in the U.S. given U.S. listings will be more stringently scrutinized.
9. Hong Kong may also implement new rules related to SPAC listings to prevent the possibility companies will use SPACs to “bypass” new IPO rules.

Benzinga’s Take: The CCP is struggling to balance its desire to maintain absolute power over Chinese corporations with its need for outside investment to fuel economic growth. The Didi crackdown immediately following its U.S. IPO was a slap in the face to American investors.

The CCP is now running the risk of making any Chinese companies completely toxic in the minds of U.S. retail investors and private equity firms for the time being, potentially significantly reducing China’s access to U.S. capital.