Chinese stocks fell today on some negative news for the sector, including stricter regulations and weaker economic data.Shares in private education companies New Oriental Education Technology Group (educate -10.05%) Down about 10% today; shares of online coaching firm TAL Education Group (TAL -21.60%) down 21.6%; and stakes in real estate companies KE Holdings (Baker -9.54%) It ended the day down about 9.5%.
On Friday, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) introduced a new set of export regulations specifically targeting the sale of semiconductor chips and related hardware to China. BIS will require companies wishing to sell such hardware to China to apply for a license.
In addition, other foreign companies that use U.S.-made tools to make chips for sale to China also need to apply for a license. The BIS said the measures were part of an ongoing effort to protect the security and interests of countries abroad.
“As I told Congress in July, my North Star at the BIS is to ensure that we do everything within our power to appropriately protect our national security and prevent sensitive technology with military applications from being used by the People’s Republic of China’s military, intelligence, and security services,” BIS Deputy Minister Alan Estevez said in a statement. The move, which appeared to heighten tensions between the U.S. and China, came in response to new rules over the weekend.
Chinese Foreign Ministry spokesman Mao Ning said the U.S. abused its export control measures to obstruct Chinese companies. NBC Finance Channel.
In other news, the U.S. Securities and Exchange Commission (SEC) listed New Oriental Education Technology Group as a Chinese stock that could be delisted under the Foreign Company Controlling Accountability Act (HFCAA). The HFCAA stipulates that foreign companies cannot trade on U.S. stock exchanges if they have not had working financial statements audited by U.S. regulators for three consecutive years.
The issue has been a problem for Chinese companies because the Chinese government has previously denied U.S. regulators audits due to privacy and national security concerns. Earlier this year, U.S. and Chinese financial regulators reached a tentative agreement to allow U.S. regulators to inspect auditors in China and Hong Kong. It marks a big step forward, but U.S. regulators appear cautious about celebrating.
The SEC’s naming of New Oriental today could reignite investor concerns about the delisting of Chinese stocks. In addition, weak consumer spending in China due to ongoing lockdowns due to COVID-19 also appears to have impacted the industry.
What should we do now
Part of the risk of holding Chinese stocks on U.S. exchanges is how many external factors can significantly affect investor sentiment, including U.S. regulation, domestic regulation in China and escalating U.S.-China relations. There are also multiple economies to watch. Today, all of these factors come into play.
Many of these companies have enormous potential given the huge Chinese market, but you do need to understand how all these external factors affect each stock. That’s why more due diligence than usual is required if you’re going to invest in this industry.
Bram Berkowitz has no positions in any of the stocks listed above. The Motley Fool recommends New Oriental Education Technology Group and TAL Education Group. The Motley Fool has a disclosure policy.