Alibaba Group Holding Ltd (BABA)

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Why the Rally in Alibaba, NIO and Other Chinese Stocks May Be Short-Lived
By: Barron's | April 4, 2022

U.S.-listed Chinese stocks like Alibaba , NIO , and JD.com were soaring Monday after Chinese authorities moved to cooperate with U.S. regulators and signaled concessions on an issue that has created significant uncertainty for this group of companies.

The China Securities Regulatory Commission (CSRC), in a joint statement with other regulators, said Saturday that it would loosen its auditing rules. This includes removing the legal requirement that on-site inspections be mainly conducted by Chinese authorities or rely on their inspection results, according to a summary of the changes published in Chinese, translated by Barron’s with Google translate software.

Chinese companies listed in the U.S. have faced intense pressure from regulatory concerns over the past year. Headwinds have picked up in recent months as Washington has renewed the prospect that Chinese companies may be forced to delist in the U.S. if they don’t meet accounting transparency rules. If China moves to satisfy the demands over accounting transparency from Washington, and Washington agrees, it would lift a cloud of uncertainty from this group of stocks.

“Requests made by overseas regulators to conduct investigations, including collecting evidence for investigation purpose, and inspections in the Chinese mainland shall be carried out through cross-border regulatory cooperation mechanisms,” the CSRC said in an English-language statement. It “will lay an institutional foundation for secure, efficient cross-border regulatory cooperation,” the regulator said.

Alibaba (ticker: BABA) jumped 4% in U.S. premarket trading on Monday, with NIO (NIO) nearly 6% higher and JD.com (JD) gaining more than 5%. The news that broke over the weekend confirmed a report last week that the move was coming, which sent these stocks higher on Friday.

But analysts warned that the rally driven by regulatory news may be short-lived.

“It still depends on how the U.S respond on this,” Danny Law, an analyst at Guotai Junan Securities, one of China’s biggest investment banks, told Barron’s. “There is still high uncertainty for getting a consensus from the U.S.”

Law also highlighted that regulations still include protections for data that the Chinese government deems sensitive and a security — a definition that U.S. regulators may not agree with.

“Tech companies in China are still required to comply with such regulations, particularly with [highly] sensitive data,” the analyst said. “It is quite difficult for tech companies in China to strive for a balance between China’s regulations and overseas regulations.”

Other analysts were more upbeat.

“Now that China has shown it’s ready to compromise, it is the U.S. regulator’s turn to respond,” Bo Pei, an analyst at broker U.S. Tiger Securities, told Barron’s. “While I think there will still be some back and forth, I believe the overall direction is positive.”

Greater cooperation with the U.S. over some of China’s largest companies, listed in the U.S., has been in the works for weeks. In March, the Chinese government said it would work to boost economic growth and support the stock market, as well as clear up a punishing regulatory environment, including concerns around U.S. delistings.

While Alibaba and its peers were rallying for a second session, Law cautioned that the moves represented only changes in short-term market sentiment.

“We expect market sentiment will only support the short-term valuation,” the analyst said. “For the longer term, [the market] will follow the Company’s fundamentals.”

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