What happened
Shares of several large Chinese stocks traded on U.S. exchanges continued their ascent this week following positive news from Chinese regulators. In fact, Chinese stocks have had their best multiday rally in the 21st century this week.
Shares of e-commerce giant Alibaba ( BABA 7.90% ) traded about 5.5% higher today as of 10:20 a.m. EST. Meanwhile, shares of the ride-hailing company Didi Global ( DIDI 59.77% ) jumped more than 32%, and shares of TAL Education Group ( TAL 14.80% ) traded more than 16% higher.
So what
After what has been a brutal year for Chinese stocks listed on U.S. exchanges, things looked as if they were getting worse last week when the U.S. Securities and Exchange Commission named five Chinese stocks that could possibly get delisted. The issue revolves around a decades-long feud between U.S. and Chinese regulators because Chinese companies are not allowed to have their active financial documents reviewed by U.S.-based accountants. Meanwhile, U.S. regulators passed a law in 2020 that says that companies that aren't audited by regulators for three years in a row can't trade on U.S. exchanges.
Chinese stocks have been largely soaring all week after the Chinese government came out in support of Chinese stocks listed abroad and said it plans to ease some of the restrictive policies it has put in place over the past year and work with U.S. regulators to find a resolution on the audit issue.
The news has been met with a positive outlook from investors and analysts. Earlier this week, analysts at Credit Suisse upgraded its rating on Chinese stocks to overweight.
"We think that Chinese equities offer attractive upside potential, with valuations still depressed. Efforts to contain the current COVID-19 outbreak are likely to have a more limited impact than in 2020 and 2021," Credit Suisse said in a research note.
Thomas Hayes, chairman of Great Hill Capital, told Yahoo! Finance earlier this week that he thinks the returns in the sector are going to be "spectacular" over the next eight to 12 months and that he is particularly focused on Alibaba.
"The only two things holding these companies back were ... the tech crackdown over the summer, in earnest, and then the delisting risk," Hayes said. He added, "The businesses were growing despite the regulatory crackdowns, despite the zero-COVID shutdowns."
Didi is in a particularly interesting spot right now. Last week, the company, which had previously announced plans to leave the New York Stock Exchange (NYSE), said that it would delay its plans to list shares in Hong Kong, sending its stock down 44%. The Chinese government reportedly told Didi that its plans for data security were not in line with regulations. Chinese regulators have been a real problem for the company, suspending Didi apps from app stores in the country. However, with a potential cooperation agreement in the works between Washington and Beijing, investors might be hopeful that Didi will be able to continue trading on the NYSE.
Now what
A cooperation agreement between the two governments would be great, but there is still the possibility it won't come to fruition.
The Public Company Accountability Oversight Board, one of the main organizations leading the charge on delisting noncompliant Chinese stocks, said this week that while it is seeking a resolution, regulators must still have the same access to Chinese financials that they get from other foreign companies trading on U.S. exchanges. There is no certainty that Chinese regulators will want to grant this full access.
If a resolution is reached, that would be great for investors because they could then focus more on the fundamentals of individual Chinese companies as opposed to what regulators are doing. But understand that there is still a chance it won't happen, and always expect more volatility with Chinese stocks than in other sectors of the market.
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