Why Alibaba, Nio Could See Relief From Regulatory Overhang On Chinese Stocks

After the steep drop seen in U.S.-listed Chinese stocks amid delisting fears, China has shown willingness to arrive at a resolution. A recent report suggests Chinese regulators are working overtime to sort out differences that would allow the continued listing of these companies.

What Happened: Chinese authorities have let up from a dogged stance and are working on ways to give U.S. regulators full access to audit reports of more than 200 companies listed in the U.S. by the middle of 2022, Bloomberg reported.

The China Securities Regulatory Commission and the other national regulators have set forth to draft a framework to allow this, the report said, citing people familiar with the matter. But authorities are leaning toward allowing some of the state-owned enterprises and private companies holding sensitive data to be delisted, it added.

The framework, according to the report, will provide clarity on what kind of data may trigger national security concerns and whether companies collecting consumer data such as Alibaba Group Holding Ltd - ADR BABA and Tencent Holdings ADR TCEHY will fall in this category.

The processing of huge volumes of such data alone doesn't place Alibaba under firms handling sensitive information, the report said, citing sources.

If the discussions among Chinese authorities turn fruitful, it would remove one of the biggest overhangs on U.S.-listed Chinese companies. The U.S. has given an ultimatum for these companies to comply with audit disclosure norms by 2024 in order to stay listed.

"The compromise would also show China's willingness to balance national security concerns with the needs of investors and businesses at a time when its economy faces numerous challenges," Bloomberg reported.

The U.S. SEC has made it clear that it is not willing to allow anything less than full compliance even though China was signaling all along that it was ready to allow limited audit disclosures.

Related Link: Didi Buckles Under Regulatory Pressure, Opts To Delist From NYSE: What This Means For Investors

What China's Thawing Mean For Domestic Companies: Despite fundamental soundness, some of the biggest Chinese tech giants have suffered amid the wrangling going on between the U.S. regulators and their Chinese counterparts.

Alibaba shares have been seeing an extended sell-off since late 2020 amid China's regulatory clampdown on high-profile companies in a bid to check their unhindered growth. The sell-off extended to other tech and for-profit education names in early 2021.

The audit inspection disagreement between China and U.S. intensified the weaker sentiment toward these stocks. The SEC released earlier this year a list of five U.S.-listed Chinese companies facing the prospect of potential delisting due to non-compliance. This had a domino effect on the other Chinese companies and they reacted with sharp moves to the downside.

China's conciliatory stance is key for removing a near-term overhang on these stocks. NIO Inc - ADR NIO has been caught in the vortex of this sell-off despite a fairly decent performance in 2021 and the promise of further improvement in 2022 amid a slew of product launches.

BABA, NIO Price Actions: At last check Friday morning, Alibaba was seen rallying 5.62% to $114.95 and Nio shares were advancing 8.76% to $22.90.

Related Link: Why Rotation Out Of Chinese Tech Stocks Bodes Well For Apple, Microsoft And US Tech Stocks