Morgan Stanley cautions against Chinese ADRs as delisting looms By Reuters

© Reuters. FILE PHOTO: The headquarters of Morgan Stanley is seen in New York January 9, 2013. REUTERS/Shannon Stapleton/File Photo

SHANGHAI (Reuters) – Morgan Stanley (NYSE:) cautioned on Friday against exposure to U.S.-listed Chinese tech firms after the U.S. accounting watchdog moved a step closer to removing non-compliant Chinese companies from American exchanges.

The Public Company Accounting Oversight Board (PCAOB) on Thursday proposed a new rule that signals steady implementation of steps to delist U.S.-listed Chinese companies whose audit work paper cannot be accessed by the PCAOB.

Morgan Stanley said in a research report that the move is negative to Chinese American Depositary Receipts (ADRs) that are already suffering from Beijing’s tighter internet regulations, and simmering concerns of rising inflation, which bodes ill for growth stocks.

“We believe this is negative for those stocks affected and would recommend hedging strategy,” Morgan Stanley wrote.

The PCAOB proposal signals the Holding Foreign Companies Accountable Act (HFCAA), aimed at delisting non-compliant foreign companies listed in the U.S., “is being implemented steadily and is now closer to being fully executed,” the bank said.

The HFCAA was signed by former U.S. President Donald Trump and has gained bipartisan support.

The S&P/BNY Mellon’s China ADR Index, which tracks U.S.-listed Chinese firms including Alibaba (NYSE:) Group Holding, JD (NASDAQ:).com and Baidu Inc (NASDAQ:), is down roughly 10% so far this week, having tumbled nearly 40% since mid-February.

The sharp fall had been partly driven by China’s deepening anti-monopoly campaign, and uncertainly around rising yields amid heightened inflation expectations.

The PCAOB said its proposed rule https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-proposes-rule-to-create-framework-for-hfcaa-determinations provides a framework to use when determining whether it is unable to inspect or investigate completely accounting firms located in a foreign jurisdiction due to local rules.

China has barred foreign access to audit works of certain overseas-listed companies, citing national security concerns. China’s securities watchdog has repeatedly said it is open to discussing the issue with the PCAOB but that its proposed solution got no response from the U.S. side.

Morgan Stanley recommended a hedging strategy, under which investors buy ADRs that are eligible for immediate Hong Kong secondary listing, while selling those ADRs that are ineligible. (This story corrects to remove duplicated words on Friday from first paragraph)

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Be the first to comment

Leave a Reply

Your email address will not be published.


*