China ETFs Drop On Audit Enforcement

The first tranche of Chinese ADRs affected by a 2020 law has been released.

ETFs that track China are dipping after U.S. regulators started implementing a 2020 law that could potentially lead to a full removal of Chinese companies listing on American exchanges within several years. 

The SEC on Thursday named the first five Chinese companies deemed to be in violation of the Holding Foreign Companies Accountable Act, which targets Chinese companies with American depositary receipts (ADRs) deemed by the Public Company Accounting Oversight Board to not be in full compliance with U.S. laws. The companies would be delisted if they do not provide U.S. regulators three straight years of auditing after being designated in violation of the law. 

China does not allow its domiciled accounting firms from submitting to submit to audits from foreign regulators on national security grounds. If that policy is not reversed, every Chinese company using ADRs to trade on the U.S. market could be delisted in the next several years. However, U.S. investors can still get exposure to those companies through Hong Kong-listed stocks. 

The release of the list set in motion a broader sell-off in Chinese ETFs, with the benchmark iShares MSCI China ETF (MCHI) falling 4.35% on Thursday. 

The first five companies hit by the law are biotechnology firms Zai Lab, BeiGene and Hutchmed, along with semiconductor cleaner ACM Research and Yum China, the spinoff of the American holding company for KFC, Taco Bell, Pizza Hut and other fast food chains. 

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The stocks combined make appearances in 255 U.S.-listed ETFs and carry just more than over $1.34 billion in market value, according to FactSet data. 

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