The pricing of China-based ADRs – so Zhihu (NYSE: ZE), KE Holdings (NYSE: BEKE), Pinduodo (NASDAQ: PDD), and Didi (NYSE: DIDI) stocks as examples – has been extremely volatile this past few weeks. The problem is both political and also economic. Today’s 30 to 40% rise in all of those China-based ADRs, and of others in the sector, might well be just relief that things aren’t getting worse on both fronts.
The political problem is that the Chinese government seems to be backtracking on the idea of Chinese companies listing in the US at all. Didi, for example, has mulled over the idea of withdrawing the NTSE listing altogether and replacing it with one in Hong Kong. This would markedly reduce the liquidity of course and so was not well received by investors or the Didi share price. That idea also got withdrawn when the HK authorities thought that Didi didn't meet their standards.
Much the same has been happening across the range of China-based ADRs traded in New York. This has been compounded by further political risk. All of these companies have, of course, their major trading activities within China. The Chinese government has also been intervening much more in who may do what. That flotation of Ant Financial that never happened, was a result of a change of mind over who may do what in that financial sector, for example.
Then there’s the economic problem. This comes in two flavours again. One is that there are deep-seated problems in the Chinese economy itself. The near absurd levels of investment as a percentage of GDP have led to a wildly overblown housing and construction sector. This is one of those things that can be put off but at some point, a correction will occur. So the troubles at Evergrande and other developers are worrying many about the coming macroeconomic effects.
Then there’re the more immediate and specific worries about covid, the omicron variant. The extremely strict lockdowns in earlier waves of covid mean that natural immunity in the population is low. The Sinopharm vaccine isn’t all that effective – some reports say only 50% so. This does mean that the highly contagious omicron variant is currently ripping through the population. That omicron is more contagious and less virulent means that this is likely to be a short to medium-term problem rather than a disaster is true but still unsettling for stock prices.
This past few weeks has therefore seen a distinct lack of enthusiasm for the Chinese ADRs. What we’re seeing today is likely a reversal of that sentiment. The Hang Seng Index – The Hong Kong equivalent of the S&P or FTSE100 – was up 10% in just the one day’s trading earlier today.
The change of sentiment seems to be widespread, affecting many to all of the China ADRs and also the same stocks and even types of stocks on other markets.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.