Why shares of Pinduoduo, KE Holdings and Baidu are falling this week

What happened

Shares of many Chinese stocks that trade on US exchanges have struggled this week after the sector grappled with a number of regulatory and economic developments.

For the week, shares of Chinese company agtech Pinduo-duo (NASDAQ:PDD) had fallen nearly 13% as of Thursday’s market close, according to data provided by S&P Global Market Intelligence.

Meanwhile, shares of the Chinese real estate platform KE Holdings (NYSE: BEKE) was trading more than 20% lower, and shares of the artificial intelligence company Baidu (NASDAQ: BIDU) fell by about 11%.

So what

Over the past weekend, investors digested a set of sweeping new rules aimed at hampering China’s military capabilities, stoking tensions between China and the United States.

Image source: Getty Images.

The U.S. Department of Commerce’s Bureau of Industry and Security has imposed new export controls requiring U.S. companies seeking to sell certain semiconductor chips or other hardware to China to apply for a license. Additionally, foreign companies seeking to do so that use US-made tools to manufacture certain chips would also need to apply for licenses.

“The PRC (People’s Republic of China) has invested resources in developing supercomputing capabilities and seeks to become a world leader in artificial intelligence by 2030. It uses these capabilities to monitor, track and monitor its own citizens and fuel its military modernization,” Thea D. Rozman Kendler, assistant secretary of commerce for the export administration, said in a statement.

She added, “Our actions will protect U.S. national security and foreign policy interests while sending a clear message that U.S. technology leadership is about values ​​as well as innovation.”

Separately, the U.S. Securities and Exchange Commission (SEC) continued to name Chinese stocks traded on U.S. stock exchanges that could potentially be delisted under the Holding Foreign Companies Accountable Act (HFCAA). The law states that if foreign companies are not properly audited by US financial regulators for three consecutive years, they can no longer trade on US stock exchanges.

The issue is specific to Chinese companies, as the Chinese government has frequently banned such audits, citing national security and data privacy concerns.

US and Chinese financial regulators appeared to be making progress, having reached a preliminary agreement in September for US auditors to conduct joint audits of companies in Hong Kong and China. But the SEC continuing to denounce Chinese stocks at risk of being downgraded may have revived fears on this subject.

Finally, investors continue to worry about the spread of COVID-19 in the country and the lockdowns, which have weighed on the economy and its growth prospects.

Now what

Events this week show just how much regulation, here and in China, can impact Chinese equities.

I think these three names have great potential. KE Holdings is China’s leading online and in-person real estate brokerage. Baidu runs the country’s leading search engine (think Google) and is rolling out driverless taxis. And Pinduoduo allows Chinese consumers to buy fresh produce from farmers through an online platform.

When you think about the Chinese people, these three tech companies have huge opportunities. But before you invest, you need to do a lot of due diligence on the impact of regulation on their business models.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool fills positions and recommends Baidu. The Motley Fool has a disclosure policy.

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