On Thursday, Chinese stocks experienced a significant drop. Possible reasons for the decline are outlined below.

Select Chinese stocks have declined sharply on Thursday.

The Securities and Exchange Commission has identified five U.S.-listed American depositary receipts of Chinese companies (, , , and ) for failing to adhere to the Holding Foreign Companies Accountable Act (HFCAA), leading China watchers to believe that this is likely the reason for the delisting.

Non-U.S. company shares can be represented by ADRs, which are traded on U.S. exchanges.

In 2020, a law was enacted that allows the SEC to prohibit companies from trading and remove them from U.S. exchanges if American regulators are unable to review their audits for three consecutive years.

The five China ADRs that have been identified as failing to adhere to the HFCAA are those that recently filed their annual reports with the SEC.

According to Brendan Ahern, chief investment officer at KraneShares, all Chinese ADRs are likely to end up on the list because none of them will be able to comply with requests to have their audits reviewed due to Chinese law prohibiting auditors from providing their review to U.S. regulatory authorities.

Gary Gensler, SEC Chair, stated that the clock started last year, meaning the earliest a company could be delisted would be 2024, three years after the initial announcement.

In the past year, six U.S.-listed Chinese companies have become dual-listed in Hong Kong due to disputes with China.

KWEB, a basket of overseas-listed Chinese Internet companies, has shifted its focus. A year ago, it was 75% U.S.-listed, but now it is only 34%, with the rest in Hong Kong.

Ahern informed me that even before the Holding Foreign Companies Accountable Act, Chinese companies were becoming cautious about U.S. investors.

He stated that these companies are often used as stand-ins for China and the trade conflict, and they may not always base their trading on fundamental principles.