Stock Market Analysis Today – Chinese Stocks: Gauging Risk in a Biden Administration | Stock Market News

China’s clear emergence as an economic superpower in the 21st century has brought with it the mainstreaming and legitimization of Chinese stocks for U.S. investors.

The 2010s, in particular, brought a symbolic indication of Chinese firms’ might with the record-setting 2014 initial public offering of e-commerce giant Alibaba Group (ticker: (BA)(BA)), which still reigns supreme as the world’s largest-ever public offering of a nonstate entity, raising $21.8 billion.

So the recent chaos surrounding three multibillion-dollar Chinese telecom stocks, long traded on the New York Stock Exchange, understandably came as a jolt to many U.S. investors.

A “lame duck” executive order from former President Donald Trump banned Americans from investing in dozens of Chinese stocks as of Jan. 11, among them were the heavily traded and NYSE-listed China Mobile, China Telecom and China Unicom. Most of the affected companies, however, were not listed in the U.S. Investors have until Nov. 11 to shed their existing holdings.

Investors now face some big questions: How will President Joe Biden‘s administration handle increasingly heated economic tensions with China? Are Chinese stocks, which constitute an increasingly large portion of institutional portfolios as well as individual Americans’ brokerage and 401(k) holdings, facing new or previously unrecognized levels of risk?

“I do believe the overall tenor in terms of friction between the U.S. and China will continue, and that’s been made very clear by the incoming U.S. Secretary of State Antony Blinken,” says Arthur Dong, professor of strategy and economics at Georgetown University’s McDonough School of Business.

In a confirmation hearing before the U.S. Senate on Jan. 19, Blinken’s comment that “President Trump was right in taking a tougher approach to China” made waves. Blinken, who served as Deputy Secretary of State under former President Barack Obama from 2015 to 2017, also cosigned on outgoing Secretary of State Mike Pompeo’s declaration that China is engaged in acts of genocide against the minority Muslim Uighur population.

While these comments, in addition to Blinken’s vow that the U.S. would stand behind the self-governed republic of Taiwan, weigh on what Biden‘s China tenor may be in the early days of his administration, most experts don’t see additional investment bans as recurring policy tools of the current White House.

Dennis Yang, professor of business and academic director of Asia initiatives from the University of Virginia’s Darden School of Business, characterized the Trump administration’s economic policies toward China on issues like tariffs and investment bans as unusual regarding past experiences.

“Investors should have a sense of calm,” Yang says. “We’re very unlikely to have similar experiences under the new administration,” he adds, citing the U.S.-China trade war under the Trump administration.

In addition to the fact that the growing outward hostility toward China strikes a discordant tone in the longer symphony of U.S.-China relations, there are also practical reasons not to disrupt U.S. investor access to Chinese stocks.

The first reason is simple: market size and growth.

“China is the only major economy in this COVID-pandemic era that’s actually on a growth path,” Dong says.

It’s not a trivial observation. The U.S. economy is expected to have declined 3.6% when 2020 numbers are finalized, while the World Bank expects the GDP of the entire eurozone will have contracted by 7.4%. China, however, just announced a growth rate of 2.3% for the full year, led by a 6.5% fourth-quarter rebound that kept China’s 2020 economy in the growth column.

The ability of China to solider through a pandemic-ravaged global economy and manage to grow makes China an incredibly attractive place to invest, Dong says.

The use of investment bans on Chinese stocks is a “curious tool,” says Harry Broadman, managing director with Berkeley Research Group, who has served in two White House administrations. He was chief of staff of the president’s council of economic advisers under President George H. W. Bush and then served as a U.S. assistant trade representative under President Bill Clinton.

“One would think having U.S. investors in [Chinese] firms could produce salutary outcomes for people interested in reforms,” Broadman says.

“You don’t need a Ph.D. in economics to understand that if you’re going to continue to change the regulatory treatment, including the listing and delisting of firms,” uncertainty will follow, Broadman says.

Few policy experts view further dramatic investment restrictions on Chinese stocks as helpful, practical or even very likely going forward.

With the combined valuations of the four largest remaining Chinese stocks available in the U.S. – Alibaba, Tencent (TCEHY), Pinduoduo (PDD) and JD.com (JD) – approaching $2 trillion, this is an important factor to understand for U.S. investors.

Several other risks might be even more relevant to Chinese firms.

One is simply currency risk, something relevant to all international investments. For example, China, which doesn’t have a free-floating currency but rather sets its own currency exchange rates, suddenly devalued its currency in 2015, sparking a brief but swift sell-off in Chinese stocks.

Another risk that’s generally well understood by investors is the tight control that Chinese President Xi Jinping and the Chinese Communist Party have over industries within their borders. Investors can’t expect to challenge unfair government policies with sound legal maneuverings as they might in the U.S.; China’s whims instantly become reality – just ask Jack Ma, the majority shareholder in Ant Group, whose IPO was unceremoniously put on ice in the wake of Ma’s criticism of Chinese regulators.

But there’s another risk that’s a bit more alarming, says former U.S. diplomat Broadman, and it’s arguably a much bigger concern for U.S. investors than any future delisting threat.

“I’ve been surprised that U.S. regulators over the years have treated Chinese firms and investments as being of the same quality as firms from the EU or Brazil,” Broadman says. “The notion that these firms are following international accounting rules is a bit of a fantasy,” Broadman says of Chinese stocks in general.

“The reason why U.S. regulators are interested in allowing these Chinese firms to be listed is you’ve got U.S. stock exchanges that are in competition (with other international) equity markets,” Broadman says.

“You come to the age-old question of public policy and what’s the right call to make. But I see no real discussion of the quality of their accounting. And I think it’s a big issue,” Broadman asserts.

It’s good that investor attention is being focused on risks to Chinese stocks in the wake of the recent delisting fiascos. But accounting standards with Chinese firms have arisen in the past, and these do present large potential problems. To date, these concerns have largely manifested with smaller firms, although larger companies like Luckin Coffee (LKNCY), which fraudulently over-reported revenue, wasn’t an insignificant offender, with its market value plunging from more than $12 billion to around $2.5 billion within the last year alone.

With the possibility that financial fraud in increasingly large Chinese firms becomes more prominent in time, investors should focus less intensely on the topical and timely issue of delistings and instead attend more closely to other risks: namely accounting and quality of earnings.