Shares in Alibaba (NYSE:BABA), NIO (NYSE:NIO), and XPeng (NYSE:XPENG) are surging today. The jump at the market open is the largest that shares in these Chinese companies have seen since 2008. The catalyst for the move is an announcement from the Chinese government that it intends to do four things:
- Support overseas stock listings
- Stabilise capital markets
- Resolve risks around property developers
- Speed up the process of regulating big tech companies
In doing so, the Chinese authorities have addressed three of the biggest risks that investors who have exposure to Chinese stocks face. Some — most notably Charlie Munger — were less worried about these than others. But the market’s response to today’s announcement indicates that investors are generally feeling more comfortable about the risks. Let’s take Alibaba as an illustration of all three.
VIE structure
Investors who buy the NYSE-listed entity with the ticker symbol ‘BABA’ aren’t buying shares in Alibaba. Instead, they’re buying shares in a ‘variable interest entity’ (VIE) that is a separate company that has contracts that give it a claim on Alibaba’s assets and earnings. Why does such a thing exist? Because under Chinese law, it’s illegal for Alibaba to have non-Chinese shareholders. The VIE structure is intended to allow foreign capital access to Chinese companies (albeit indirectly) and to allow Chinese companies access to foreign capital.
The risk comes from the fact that a VIE is designed to circumvent Chinese law. As such, its contracts — which are the only things it has of any value or that connect it in any way to Alibaba, the company — might not be enforceable. That would mean that shares in the VIE could be worthless if the Chinese authorities ever decided to clamp down on VIE structures. Today’s announcement that China intends to support overseas stock listings goes some way towards limiting concerns about this possibility.
Delisting
A second source of concern comes from the possibility of the US delisting Chinese stocks from the NYSE. The Holding Foreign Companies Accountable Act of 2020 requires Alibaba to submit audit documents in support of its financial statements. Otherwise, it can be delisted from the US exchanges. The trouble is, Chinese regulation prevents them from doing this.
This concern is assuaged somewhat by the announcement that the Chinese authorities are prepared to support overseas stock listings. The details are still to be worked out, but the idea that there might be the will to work towards resolving the impasse is encouraging for investors.
Regulation
The third major risk associated with Alibaba is the threat of government regulation. Alibaba has more history than most with this threat, after it picked up a record fine last year for abusing its dominant market position. But it’s far from unique. Various other Chinese tech companies have also faced similar sanctions.
The risk of further interventions against Alibaba and China’s other big technology firms has been a source of uncertainty around the stocks. Today’s announcement that the Chinese regulators intend to make things more transparent is positive news for investors.
