U.S. Stocks Plunge, Chinese ADRs Sink 10% Again

On Friday afternoon, European stock markets opened higher, and U.S. stocks also rose when they opened in the evening. However, as the United States announced the latest sanctions, U.S. stocks immediately plummeted.

The Dow Jones Industrial Average saw its largest drop exceed 600 points, and a batch of Chinese concept stocks, after a crazy decline on Thursday, once again experienced a significant drop on Friday, with DiDi's decline reaching 44.08%, and the NASDAQ Golden Dragon China Index, representing Chinese concept stocks, fell by 10.18%.

For now, are Chinese concept stocks and related thematic funds more investment-worthy, or do they face greater risks?

01

The consecutive two-day decline of Chinese concept stocks initially stemmed from Thursday when the U.S. Securities and Exchange Commission disclosed that five Chinese concept companies were included in the pre-delisting list due to the "Foreign Company Accountability Act."

In fact, the increasingly strict regulation of Chinese concept stocks has been going on for a long time. During this period, the reasons for the decline of Chinese concept stocks are not singular but are caused by a combination of risks.

During this period, there were already factors such as the continuous rise in U.S. inflation and the imminent interest rate hike, coupled with the increasingly tense conflict situation in Europe. U.S. stocks have fallen from their high levels at the beginning of January and have continued to decline and fluctuate, and the news on Thursday further intensified the decline of Chinese concept stocks.

Under this increasingly strict regulation, it is believed that more Chinese concept stocks listed in the United States will have to delist in the future or choose to list in Hong Kong for the second time.

Chinese enterprises that were previously listed in the U.S. stock market and are now listed in Hong Kong have exceeded 20, some of which are listed again after delisting, and some are listed in both places at the same time. These enterprises have already prepared a fallback, so the impact of the U.S. Securities and Exchange Commission's stricter regulation on Chinese concept stocks is relatively smaller for them.

However, it is not entirely without impact. At least for now, these impacts have been transmitted to the Hong Kong stock market, so the Hang Seng Technology Index has also seen a significant decline in the past two days.After all, companies that are listed both in the US and Hong Kong stocks account for 28.2% of the Hang Seng Tech Index, hence they are more significantly affected. In contrast, the impact on the Hang Seng Index is relatively smaller, as the proportion of dual-listed companies in the Hang Seng Index is 10.4%.

Yesterday, some friends consulted me about whether there would be risks for funds that have invested in Chinese concept stocks if these stocks delist from the US market. Taking the well-known China Internet ETF as an example, the fund's holdings are highly concentrated, with the top ten stocks accounting for 89% of the total. Among these ten stocks, six are Chinese concept stocks listed in the US, which is a proportion of 60%.

Therefore, if Chinese concept stocks are delisted from the US in the future, the impact could be substantial, and this is precisely what investors are worried about. However, based on the analysis above, we can understand that if these companies delist from the US stock market, the risk for many enterprises is not that significant. After all, some companies have already chosen to list in Hong Kong, and others can consider in the future whether they need to privatize and then opt for a secondary listing in Hong Kong.

By purchasing these stocks, the funds essentially become shareholders of these companies. As long as they can eventually list in Hong Kong (listing in A-shares would be even better), these stocks will still have the opportunity to be traded, and often the valuations upon secondary listing can be higher.

On the other hand, fund companies and fund managers will also pay attention to these risks. If there is a situation where some Chinese concept stocks have to delist, the fund managers can choose to sell these stocks in advance before the delisting. Although these stocks will undoubtedly plummet significantly, at least there is no need to worry about the fund continuously holding these non-tradable stocks.In comparison, under the current circumstances, when it comes to investing in Chinese technology companies, choosing to invest in Hong Kong stocks seems to carry slightly less risk than investing in China-based stocks listed on NASDAQ, and the chances of a future rebound are somewhat greater.

Over the past year, as the China concept internet stocks mentioned earlier have continued to decline, both retail investors and institutions have been buying continuously. As a result, the share of China concept internet funds has also been rising, making it a rare fund that is bought more as it falls.

In addition to China concept internet funds, one can also pay attention to other similar ETFs.

There are some similar indices on the market, including the Hang Seng Internet Index and the Hang Seng Technology Index. The constituent stocks included in these two indices have only minor differences, all containing Alibaba, Tencent, Meituan, Xiaomi, Kuaishou, JD.com, NetEase, etc., but with slightly different weights.

The related ETFs also have certain differences in management fees. The ETF pegged to the Hang Seng Technology Index has a management fee that is 0.4% lower than the Hang Seng Internet ETF.

Since these ETFs correspond to companies listed in Hong Kong, even if there is a future scenario where China-based stocks listed in the United States are forced to delist, the impact on these Hong Kong stock-focused ETFs will not be too significant.

04

Is it the best time to invest in China-based stocks now?

In fact, it is difficult to have an accurate answer to such a question. The best timing implies the lowest point, and in the stock market, it is difficult to grasp both the lowest and highest points.

For friends who have already held a heavy position in this type of fund, it is advised not to add more positions.However, for those who have been holding a light position, they might consider starting to gradually buy in through a fixed investment plan from this point on.

Nevertheless, whether it's China concept internet funds or Hang Seng Technology ETFs, these types of funds are characterized by significant volatility and substantial drawdowns. They should not account for a high proportion in our fund portfolio, and everyone should be fully aware of the associated risks.