Baidu

Why shares of Baidu, Alibaba and Li Auto keep falling

What happened

For the second day in a row, Chinese tech stocks Alibaba Holding Group (NYSE: BABA), Baidu (NASDAQ: BIDU)and manufacturer of electric vehicles Li-Auto (NASDAQ:LI) tumbled.

As of 3:05 p.m. ET, Alibaba shares had lost 5.7% of their value, Baidu shares had fallen 10.5% and Li Auto was leading the entire Chinese tech space lower with a loss of 15.2%.

Image source: Getty Images.

So what

What’s wrong with Chinese technology today?

Basically, the story goes as follows: Yesterday, the United States Securities and Exchange Commission (SEC) placed companies based in China and listed in the United States Yum China Holding, MCA Research, BeiGene, Zai Laboratoryand Hutchmed on its warning list, foreign companies risk being delisted from US stock exchanges for non-compliance with the Holding Foreign Companies Accountable Act (HFCAA) of 2020.

Under the HFCAA, the SEC is permitted to “publicly disclose on its website the list of issuers identified by the Commission [and] the number of consecutive years an issuer has been identified as an issuer identified by the Commission” so that “investors and market participants … are sufficiently informed as to whether a security they hold or are considering to hold is [at] risk that this security may be subject to a trading ban in the future.”

HFCAA says that if a foreign company does not allow US audit firms to inspect its books for three consecutive years, the SEC can ban its securities from trading in the United States and remove its shares from US stock exchanges. Once this happens, investors will face significant difficulty in selling their shares.

Now what

Now granted, none of Alibaba, Baidu or Li Auto were among the five stocks named and shamed by the SEC on Thursday – but that doesn’t mean they won’t end up making the list.

Indeed, Baidu first listed its shares in the United States in 2005 and the Alibaba Group came to America in 2014, so their three-year grace periods are already well past. Li Auto shares won’t list in the United States until 2020, so there’s probably more than a year to go before you have to worry about delisting. That didn’t stop the stock from suffering the biggest losses of the bunch today, though.

Indeed, the threat of radiation could come sooner rather than later. Like UBS Mark Haefele, Chief Investment Officer of Global Wealth Management, said Barrons yesterday: “[T]he five companies [that were put on the SEC’s list Thursday] were not singled out by the SEC, but were named because they were the first U.S.-listed Chinese companies to file their 2021 annual reports. We can expect more companies to be named in the weeks coming.”

Whether the SEC will go ahead and add two of the biggest Chinese names ever to market in the US – Alibaba and Baidu – or such a major highlight as a top player in the burning electric vehicle space like Li Auto, remains to be seen. The fact that the SEC did not hesitate to name Yum China Holding, which manages the Yum! Brands‘KFC and Taco Bell in China – suggest SEC could be looking at for publicity, and more than willing to make a splash with future announcements.

If the shareholders of Alibaba, Baidu and Li Auto are also feeling nervous today, I think they have a right to be.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Baidu. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.