Trump's threat to delist Chinese stocks could cause enormous damage. That's precisely why it's a golden 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.
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.
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.
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, 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.
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.
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.
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.
Last modified: September 23, 2020 1:58 PM