Delisting Risks Prompt U.S. Investors to Flee Chinese ADRs

U.S. investors are fleeing from Chinese stocks listed in the U.S., as regulatory risks from both countries weigh on investor sentiment.  Bloomberg data shows half of China’s 40 largest companies listed on U.S. exchanges saw ownership from U.S. mutual funds and exchange-traded funds (ETFs) decline this year.

Morgan Stanley estimates that U.S. investors liquidated some $10 billion from those 40 American depositary receipts (ADRs) through mid-May.  Investors are fleeing the Chinese ADRs on an increased risk of the stocks getting delisted from U.S. exchanges.  Also, investors are wary of China’s promise of a softer regulatory stance on technology stocks after a more than yearlong crackdown on the sector. 

Some U.S. investors of Chinese stocks have moved some of their investments to Hong Kong listings, which at least saves investors from regulatory shocks that may force trading suspensions and liquidation of their stock in the U.S.  Also, fear of further regulation in China is another reason why U.S. investors of Chinese stocks move to Hong Kong listings.  Brandes Investment Partners LP said Hong Kong stocks “have been gaining share over ADRs in terms of float and liquidity.”

Passive funds are accelerating their overall retreat from ADRs.  Starting this week, MSCI Inc. switched to tracking Hong Kong shares instead of U.S. listings for Baidu (BIDU), GDS Holdings Ltd (GDS), and Bilibili (BILI).  The shift to Hong Kong listings follows similar moves made for Alibaba Group Holding Ltd (BABA), JD.com (JD), and NetEase (NTES) last year. 

The Golden Dragon China Invesco ETF (PGJ), an ETF of Chinese stocks trading in the U.S., posted its first monthly advance in seven months in May, though it’s still down -24% this year.  Despite the recent rebound in Chinese technology stocks, Vontobel Asset Management said you need a fairly strong macro recovery in China, and now is not yet time to be positive on Chinese technology firms.