The share price of the China-based electric car company Nio (NYSE:NIO) was falling today after it listed its stock on Hong Kong’s stock exchange yesterday. The stock was down by nearly 9% by afternoon trading.
With such a big drop in Nio’s stock in just one day, some inventors are likely wondering whether or not today’s share price slide is an overreaction.
While it may be a slight overreaction, overall, I don’t think investors are wrong to be concerned about Chinese stocks right now. Here’s why.
First, investors should know that Nio listing its shares on Hong Kong’s exchange yesterday is likely a move to ensure that if the company were ever to be delisted from U.S. stock exchanges, its shares would continue to trade somewhere.
Why is the company worried about that?
Because under the Holding Foreign Companies Accountable Act, foreign companies have to provide American regulators with audited financial records. If they don’t, they can be delisted from U.S. exchanges.
This week, the U.S. Securities and Exchange Commission (SEC) said that five Chinese companies had failed to do so. Nio isn’t one of them, but the announcement by the SEC has left Chinese stocks reeling.
Some Chinese companies may view a dual listing of shares on both U.S. and Hong Kong exchanges as a way to ensure that they will still have shares of stock for sale if they fail to comply with the SEC’s rules.
But with Nio listing its shares on Hong Kong’s exchange, it may have sent a message to U.S. investors that the company thinks it may eventually be delisted.
Will that happen? There’s no evidence for that right now. But investors are watching other Chinese stocks fall under SEC scrutiny and, at the same time, Nio issued shares on Hong Kong’s exchange. The combination of the two is worrying investors.
I think they’re right to be a bit cautious right now. The stock market, while still a great place to build long-term wealth, is very volatile right now. And if Chinese stocks look particularly vulnerable, it’s no surprise that some investors are looking to put their money elsewhere.
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