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China and the U.S. took steps toward decoupling as regulators in both countries this month set into motion plans to delist some Chinese companies from U.S. exchanges, the latest warning that the investment backdrop is changing, especially for do-it-yourself retail investors.The Securities and Exchange completed rules paving the way for delisting Chinese companies that don’t comply with U.S. auditing disclosures over a three-year transition period this month. In the same week, ride-hail giant
Didi Global
(ticker: DIDI) said it plans to delist from the New York Stock Exchange and seek a new home in Hong Kong months after its highly anticipated U.S. public offering was spoiled by Beijing’s cybersecurity probe as China tightens control over data. The two developments underscored that the U.S. and China may have one area they are aligned on: Increased scrutiny of Chinese companies listed in the U.S.
Barron’s has been writing for months about risks to investors as China grapples with an economic slowdown and policy makers tighten control over the private sector, especially data-oriented companies—and as intensifying competition between the U.S. and China push both countries to become less interdependent.That splintering relationship is a reason some investors see an allocation to China as a necessary form of diversification for portfolios—and the sharp selloff in Chinese stocks this year have drawn bargain-hunters. But the push toward delistings means retail investors who have relied on U.S.-listed Chinese stocks should start considering other ways to invest in China.
As Barron’s warned in July, the nearly 250 Chinese companies that Congress said were listed in the U.S. as of this summer are at the epicenter of changing geopolitical priorities.
Regulators in both countries are scrutinizing the variable interest entity, or VIE, corporate structure that many Chinese companies used to list in the U.S. and skirt China’s foreign ownership restrictions. The structure, which gives investors a stake in a shell company with a contractual relationship with the operating company, has long been a source of controversy. It’s drawn increased scrutiny of late as the U.S. and China reassess their relationship.While institutional investors can convert from ADRs to Hong Kong listings…
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