The Nasdaq Golden Dragon China Index fell for eight straight sessions—the longest losing streak in over a year—amid heightened tension between the United States and China.
Meanwhile, threatened by the U.S. Holding Foreign Companies Accountable Act, Chinese companies have shifted large chunks of equity to Hong Kong.
The Nasdaq Golden Dragon China Index, which measures the performance of Chinese companies listed in the United States, plunged 10 percent from 6,997 to 6,292 in the six consecutive trading days ending April 25. Although the Golden Dragon index rebounded to 6,570 points from April 25 to 28, it was still 427 points lower than on April 17 and 771 points lower than on March 30.
Chinese stocks listed in the United States lost more than $100 billion in value in April.
China’s Private Economy in Decline
The rapid development of China’s private economy had been a long-standing factor supporting the price of Chinese concept stocks. Still, China’s private economy has been weakened by the Chinese Communist Party’s (CCP)’s emphasis on its leadership, Davy Jun Huang, a U.S.-based economist, told The Epoch Times.
According to China’s National Bureau of Statistics, profits of private industrial companies—including manufacturers, mining companies, and power companies, whose main business revenue is more than 20 million yuan (about $2.9 million)—fell 7.2 percent in 2022. This is the first decline since tracking began in 1997. By contrast, profits at state-owned enterprises (SEOs) climbed for the second year in a row by 3 percent.
Since the CCP’s 20th National Congress, the authorities are promoting a social economy dominated by the Party’s “state-owned economy,” a phenomenon that Beijing describes as “the state enterprises advance, the private sectors retreat.” Public-private partnerships set the stage for nationalization. For example, China Unicom and Tencent set up a new venture; China Mobile joined JD.com; China Telecom teamed up with Alibaba.
A logo of Alibaba Group at the World Internet Conference in Wuzhen, Zhejiang Province, China, on Nov. 23, 2020. Aly Song/Reuters
Most of the 252 Chinese companies listed in the United States are privately owned. The few remaining SEOs—threatened by provisions of the Holding Foreign Companies Accountable Act—have said they would delist from the United States. The Act requires companies to disclose the CCP members on the company’s board of directors in their annual reports. It also requires companies to disclose whether their articles of association contain any content related to China’s Constitution.
In August 2022, China Life Insurance Co., PetroChina Co., Sinopec, Aluminum Corporation of China, and Sinopec Shanghai Petrochemical Co., Ltd. issued statements disclosing their intention to delist.
In January this year, China Eastern Airlines and China Southern Airlines also said they would file for delisting from the New York Stock Exchange.
Once these seven Chinese SEOs are delisted from the United States, only private companies will be left for China concept shares.
US and China Continue to Play Hardball
In addition to the gloomy outlook for China’s private companies, Chinese concept stocks face challenges due to tension between the United States and the CCP.
On April 20, Bloomberg reported that President Joe Biden intended to sign an executive order limiting American companies’ investment in key sectors of the Chinese economy. The United States has been discussing the measure for nearly two years and plans to take action during the G-7 summit in Japan in May.
Treasury Secretary Janet Yellen’s speech on the same day at Johns Hopkins University about U.S.-China economic relations confirmed Biden’s move. Yellen said Washington is considering a plan to limit certain foreign investments by the United States in specific sensitive technologies with significant national security implications.
“These national security actions are not designed for us to gain a competitive economic advantage, or stifle China’s economic and technological modernization,” she said.
“They are driven by straightforward national security considerations. We will not compromise on these concerns, even when they force trade-offs with our economic interests.”
Treasury Secretary Janet Yellen listens during an open session of a Financial Stability Oversight Council meeting at the Department of the Treasury in Washington on April 21, 2023. Alex Wong/Getty Images
According to Huang, Yellen and the European Union’s repositioning of economic and trade relations with China is also a fundamental factor that led to a continuous decline in Chinese concept stocks.
The day after Yellen’s speech, a spokesman for China’s foreign ministry said Beijing was firmly opposed to Biden signing an executive order to curb American investment in key sectors of the Chinese economy.
Biden’s move marks a new phase in a years-long economic campaign to counter the CCP’s unfair trade practices. The United States had already imposed tariffs on Chinese imports under former President Donald Trump. More recently, Biden has sought to restrict exports of key U.S. technologies to China.
Tensions also remain high across the Taiwan Strait, which has a bearing on U.S.-China relations. In April, House Speaker Kevin McCarthy ignored the threat of retaliation from the CCP and met with Taiwan President Tsai Ing-wen in California. McCarthy was the highest-ranking American official to meet with a Taiwanese leader on American soil in decades. Once back in Taiwan, Tsai quickly met with a bipartisan congressional delegation led by Michael McCaul (R-Texas), chairman of the House Foreign Affairs Committee.
In November 2022, during a visit to the CCP’s military operational command center, CCP General Secretary Xi Jinping instructed the army to prepare for war.
“The entire army must ... concentrate all its efforts on fighting the war and direct all its work toward it,” Xi said.
Amid tense relations between the United States and China, Chinese companies listed in the United States are shifting large stakes to Hong Kong.
US-Listed Chinese Companies Retreat to Hong Kong
By the end of March, more than 53 percent of the outstanding shares of e-commerce giant Alibaba Group Holding had been registered with Hong Kong’s Central Clearing System. When Alibaba listed in Hong Kong in November 2019, only 2.7 percent of its outstanding shares were registered in the city.
In addition, JD.com’s outstanding shares in Hong Kong have risen to 55 percent from 5 percent when it first listed; Ideal Motors’ outstanding shares in Hong Kong have risen to 38 percent from 5 percent when it first listed; NetEase’s outstanding shares in Hong Kong have risen to 18 percent from 4 percent when it first listed; Baidu’s outstanding shares in Hong Kong have risen to 23 percent from 6 percent when it first listed.
Men interact with a Baidu AI robot near the company logo at its headquarters in Beijing on April 23, 2021. Florence Lo/Reuters
The biggest reason why China concept stocks are fleeing the United States is the implementation of the Holding Foreign Companies Accountable Act by the U.S. Securities and Exchange Commission (SEC) in December 2021. The Act requires foreign companies listed in the United States to be vetted by the Public Company Accounting Oversight Board (PCAOB). Foreign companies listed in the United States are required to disclose their relationships with foreign governments and prove that they are not owned or controlled by foreign governments. If these two requirements are not met, the SEC has the right to ban the company’s securities from trading on stock exchanges in the United States.
The CCP has long ordered auditing firms of Chinese companies not to turn over audit papers to U.S. regulators. In this unfair mechanism, fraud in China concept stocks emerged endlessly, and the CCP’s intervention and control of enterprises is difficult to be detected by outsiders. In August 2022, based on the Holding Foreign Companies Accountable Act, the PCAOB signed an agreement with China, forcing the latter to allow the PCAOB to conduct inspections and investigations that meet U.S. standards.
Drawing on a lesson from the history of being played by the CCP, SEC Chairman Gary Gensler warned, “Make no mistake, though: The proof will be in the pudding.” He said the agreement only makes sense if the PCAOB can thoroughly inspect and investigate audit firms in China. Otherwise, about 200 listed Chinese companies would still face expulsion from the United States.
In the face of the United States’ assertive stance, many Chinese companies have grown timid and sought to retreat to Hong Kong. In July 2022, Alibaba Group announced it would apply for Hong Kong as the primary listing place. Dozens of other Chinese companies listed in the United States have also completed their Hong Kong listings.
Moreover, listing a company on the Hong Kong stock market is far more manageable for CCP bigwigs than in the United States.
“A significant number of Chinese stocks are currently not actively traded in the U.S., and vested interest groups in these securities have far less control over public opinion on investment in the U.S. than they do in Hong Kong,” Huang said. “In terms of effectively and quickly cheating suckers, going back to Hong Kong is better than staying in the U.S.”
Jenny Li has contributed to The Epoch Times since 2010. She has reported on Chinese politics, economics, human rights issues, and U.S.-China relations. She has extensively interviewed Chinese scholars, economists, lawyers, and rights activists in China and overseas.
