Baidu Inc. logo is installed at the company’s headquarters in Beijing, China, on July 3, 2019.
Wanxiaojun | Visual China Group via Getty Images
Some analysts remain bearish on US-listed Chinese stocks, warning that the way forward remains uncertain, although there are signs they are at reduced risk of being delisted from US stock exchanges.
“Global investors may be a bit hasty. Everything is very, very premature right now,” said Shehzad Qazi, general manager of China Beige Book International.
March was a volatile month for Chinese stocks, which tumbled and then rebounded as Beijing signaled more support for its overseas-listed companies.
The MSCI China Index is up nearly 24% this month, reversing after a 25% plunge in the first half. This index tracks all Chinese stocks, including those listed in Hong Kong, the Mainland and the US. Its main constituents are mostly technology stocks. CNBC’s China ADR index, which tracks US-listed Chinese stocks, is up about 25% between mid-March and April 1.
“I feel like a lot of investors are very happy with the progress right now, but aren’t really focusing on the fact that there’s a lot of uncertainty out there, a lot of unknowns,” Qazi told Squawk Box Asia on Monday CNBC.
Harvey Pitt, who served as chairman of the US Securities and Exchange Commission from 2001 to 2003, added: “This is clearly an attempt by the Chinese government to give the impression that there will be more transparency. The real devil will be in the details. “
“The only question will be: Are people investing in Chinese companies now doing it with their eyes wide open?” asked Pitt, who is now CEO of consulting firm Kalorama Partners.
In early March, shares in Chinese companies came under pressure as the US Securities and Exchange Commission began identifying Chinese companies that could be delisted if they failed to meet screening requirements. These included tech giant Baidu, biopharmaceutical company BeiGene and fast-food restaurant company Yum China.
On Friday, New York-listed Chinese stocks rose further after a report that China is considering giving US authorities full access to company audits. This would allow these companies to continue trading publicly in the US. China’s securities regulator told CNBC that it had told some accounting firms to consider preparing joint inspections.
Over the weekend, Beijing also proposed revising confidentiality rules for offshore listings, removing a legal hurdle for the two countries to cooperate on audits, Reuters reported.
Qazi said: “Yes, there have been rule changes in China recently and they seem to indicate a positive step forward. But the truth is, at the end of the day, we don’t know exactly which companies the SEC will be able to audit under US rules and regulations.”
“So if the biggest players … Baidu, Alibaba, Tencent – will these companies open their books to US regulators for audits? Because if you don’t, you’re taking a bunch of market cap off,” he added.
Too early to call it a “Dragon Market Run”.
Other analysts also urged investors to remain cautious.
“Concrete policy measures to stabilize the Chinese real estate market will likely be required to sustain this market rally. China’s zero-COVID policy and activity restrictions will also weigh on consumption and sentiment in the near term, while its relationship with Russia means a threat from US sanctions will hang over markets,” Seema Shah, chief strategist at Principal Global Investors, said in last week a note.
The real estate debt crisis has loomed over China’s economy. The Hong Kong Stock Exchange recently suspended trading in over 30 stocks that failed to report earnings on time, including Chinese developers Sunac China, Shimao and Kaisa.
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“Although China may revert to a pro-market stance, it’s too early to call this a new kite market run,” Shah said.
Kieran Tompkins of research firm Capital Economics added that near-term growth prospects continue to deteriorate as high oil prices, renewed lockdowns and other factors threaten earnings growth.
“In addition, even if domestic politics are less of a concern for investors, the war in Ukraine and China’s alliance with Russia have raised fears that the invasion will accelerate the process of decoupling the country’s financial system from the US,” he said the assistant economist said in a note dated April 1.
“Therefore, we suspect that the Chinese equity market will remain under pressure, although its valuation is relatively low compared to other MSCI equity indices,” he added.