Why Trump’s Threat to Delist Chinese Stocks Is a Gift for U.S. Investors

Trump's threat to delist Chinese stocks could cause enormous damage. That's precisely why it's a golden opportunity for investors.
  • While Donald Trump’s most recent threat has ramped up tension between the U.S. and China, it’s unlikely to happen.
  • Delisting Chinese securities would hurt U.S. markets.
  • There’s an easy out for both sides, making this threat an opportunity for investors.

Tensions between the U.S. and China have reached a fever pitch, and the stock market is finally taking note.

Donald Trump’s most recent threat – to forcibly delist Chinese companies from U.S. stock exchanges – has left observers wondering what exactly that would look like.

In short, it would be a disaster. And that’s precisely why Trump’s threat could be a golden opportunity for investors.

Trump Turns up the Pressure on Chinese Stocks

Chinese securities have long been permitted to trade on the U.S. market without undergoing the same rigorous accounting audits that American companies submit to.

This has led to justifiable skepticism about Chinese stocks. The bottom line is that investors – and especially retail traders – don’t know for sure what they’re getting.

Investors got a taste of mistrust when Luckin Coffee stock was accused of accounting fraud. | Source: Yahoo Finance

Case in point: Luckin Coffee. The startup fabricated millions of dollars worth of sales, and investors who were left holding the bag got slaughtered when the share price took a nosedive. 

It’s clear why the White House is pushing for more regulation among Chinese companies. But it’s also evident why Beijing is bristling at these proposals.

China is notoriously hesitant to let outside investigators in to poke around. There’s no way Chinese officials will agree to let American auditors anywhere near their state-run businesses.

U.S. Stock Market Would Suffer from Mass Delisting

The two economic superpowers are at an impasse, but don’t expect the U.S. to simply boot Chinese stocks from American exchanges.

Why? The reason is simple: Because that would wreak havoc on an already precarious stock market.

And it wouldn’t just be individual investors with heavy exposure to Chinese stocks feeling the pain. Many huge U.S. firms are large shareholders in Chinese companies like Alibaba (NYSE: BABA) and JD.com (NYSE: JD).

Alphabet (NASDAQ: GOOGL) has a large stake in JD.com, so delisting the Chinese e-commerce company could upend the Google parent’s share price.

Alphabet is one of five stocks controlling the direction of the stock market. Donald Trump will be mindful of that as the election approaches. |Source: The Reformed Broker

Alphabet, alongside just a handful of other stocks, is propping up the market right now.

Kicking the proverbial stool out from underneath the American mega-cap isn’t the right move for Trump ahead of an election.

It’s not just tech companies at risk. Financial giants like BlackRock have heavy exposure to Chinese securities and would inevitably kick up a fuss if the White House started to make good on its threats.

BlackRock has trimmed its exposure to JD.com, but it still owns more than $1 billion worth of JD shares. | Source: CNN

And then there are the U.S. exchanges themselves. The New York Stock Exchange and Nasdaq have made a heap of money on listing fees for Chinese stocks. They wouldn’t be too eager to watch that revenue stream suddenly dry up.

Why Investors and Chinese Stocks Could Benefit

This is why Trump’s escalating dispute with China is actually an attractive opportunity for investors.

The scale of the potential damage is so enormous that the most likely outcome here is that Washington gets “hard” on Chinese companies, but agrees to leave state-run firms alone.

Trump doesn’t seem too keen on doing anything that would spook the stock market. | Source: Twitter

That would satisfy the public’s need to see Trump make good on his threats against China, but it still gives Beijing an easy compromise in order to minimize the damage.

For investors, it offers more oversight for companies like Alibaba, whose books would be open to U.S. auditors. And as long as they’re obeying the rules, it’s good for Chinese firms too.

After all, one reason investors might be nervous to pick up Chinese stocks is the relative lack of scrutiny. Luckin more than demonstrated the danger of that.

More confidence means more investment, and that’s something that is a net benefit for both sides of the equation.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Published:
May 26, 2020 4:00 PM UTC
Posted in: MarketsOp-ed
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Laura Hoy @Laura_h_says

Laura has been working as financial journalist covering US markets for more than a decade. Her work can be found in a wide variety of publications including Yahoo Finance, InvestorPlace, Nasdaq and Benzinga. She can be reached at LMarieHoy @ gmail.com