China’s Equities Rout’s Roots Go Beyond COVID, Macro Concerns

Perfect storms are gathering in all corners of the globe to roil stocks – no matter where you look.

The Dow, and the NASDAQ, have long been shorthand as barometers for how stocks are doing, in general, tied to the world’s largest economy (that would be the United States).

But of course, there are other markets showing the impact of some of the same exogenous pressures and China stands out, opening the week with the Hang Seng Index off more than 5%, overall, and the Hang Seng Tech Index is down more than 10%.

Both of those indices are trading at levels that have not been seen since 2016 and 2020, respectively.

Chief among the concerns that are bedeviling equities in China: Rising COVID-19 cases, which may (or may not) signal lockdowns ahead, and thus headwinds for all manner of firms, large and small, across all manner of verticals.

The city of Shenzhen has already instituted a lockdown, shuttering public transportation and non-essential businesses, while mass COVID testing gets underway.  No surprise here: Companies that are dependent on a return to business “as usual” — such as travel companies, saw shares sink by double-digit percentage points on the day.

Read AlsoChina Locks Down Tech Hub Shenzhen as COVID Cases Rise

There’s no real respite overseas. The Securities and Exchange Commission last week singled out five companies that might be delisted — in this case for failing to enlist the services of auditors that in turn can be reviewed by U.S. authorities.

The companies under scrutiny here include Yum China, which operates Pizza Hut and KFC in China. Other firms, such as Alibaba, have seen shudders on the Street in response, as they may face similar scrutiny.  None of this is to say that a delisting on U.S. exchanges might be “lights out” for Yum or for other firms — they still have listings on Hong Kong exchanges.

Possible Delisting 

But cutting companies off from U.S. markets makes it all the more difficult to tap the liquidity — and might we say intangible but invaluable “seal of approval” — that are hallmarks of U.S. listings.

China’s own standing on Wall Street — and as a target of potential U.S. economic sanctions — may be impacted by the war in Europe. Russia has reportedly asked China for military assistance, and help to sidestep sanctions against Russia that are already in place. Any assistance here could spark a backlash from the U.S. and its allies against China, which would roil stocks even more.

Drill down a bit, and some company-specific concerns emerge.  Tencent, as reported Monday, may be facing a fine (possibly for hundreds of millions of yuan) for violating central bank money laundering regulations.  The company has allegedly run afoul, specifically, of “know your customer” and other practices, as directed by the People’s Bank of China.  Reports on Monday from the Wall Street Journal noted that the company permitted illicit transactions including gambling.

That company-specific attention from regulators signals that more is to come, where huge fines (such as has been levied in recent months on the likes of Alibaba) may be in the offing.  The convergence of pressures on Chinese firms – from within the country itself, and on the global stage — may mean the rout will continue.