Alibaba shares fell Monday after a U.S. regulatory agency added the stock to a growing list of Chinese companies that might be kicked off Wall Street if U.S. auditors cannot inspect their financial statements. Alibaba (BABA) slid as much as 6% in Hong Kong but then pared losses to 3.8% in the afternoon. Friday’s drop came after the Securities and Exchange Commission put the company on its watchlist.
Investors have been worried about the Chinese tech giant Alibaba for years. In late 2020, however, the company was caught up in a sweeping crackdown on China’s booming technology sector. The stock has fallen nearly 70% from its all-time high and investors have wiped out billions of dollars from Alibaba’s market cap. The crackdown, coupled with a weakening economy, has slowed the revenue growth for many tech companies and led to fears that more Chinese companies will see their stocks pulled back down to Earth after seeing meteoric gains over the course of recent months.
The US Securities and Exchange Commission can remove companies from Wall Street if they fail to allow auditors from US watchdogs to inspect their financial audits for three straight years. China has for years rejected these audits, citing national security concerns. It requires companies that are traded overseas to hold their audit papers in mainland China, where they cannot be examined by foreign agencies. So far, the SEC has added more than 150 companies to its watch list, including Didi Chuxing, JD.com (JD), Baidu (BIDU), and Yum China Holdings (YUMC). On Monday, Alibaba said it would monitor market developments and “strive to maintain its listing status on both the NYSE and the Hong Kong Stock Exchange.”
Last week, Alibaba announced that it had applied to list its shares on the Hong Kong stock exchange. The move was seen as a way to prepare for the possibility that it would lose access to the U.S. capital market. Currently, Alibaba has a secondary listing on the Hong Kong stock exchange. If its application is approved, Alibaba will become a primary listing on the exchange and be eligible for inclusion in certain indexes. A primary listing status in Hong Kong gives Chinese ADRs (American Depository Shares) an optionality to diversify their listing risk and retain access to the public equity market if they are forced to leave the United States, said Goldman Sachs analysts in a report last week. Alibaba’s smooth transition of listing status could also “set the path” for many more Chinese ADRs to pursue a similar switch, Citi analysts said separately.