Several Chinese stocks fell sharply Thursday.

China observers believe that this may be because five U.S.-listed American depositsary receipts have been identified by the Securities and Exchange Commission for Chinese companies.Yum China, BeiGene, Zai Lab, ACM Research HUTCHMED() for not adhering to the Holding Foreign Companies Accountable Act (HFCAA).

ADRs can be described as securities representing shares in non-U.S. corporations and traded on U.S. markets.

This 2020 law, passed by the SEC, allows companies to be banned from trading or delisted from U.S. stock exchanges, if American regulators cannot review audits of company accounts for at least three years consecutively. 

These ADRs from China are among the first to be found to have violated the HFCAA. This list includes five Chinese companies that recently submitted their annual reports to the SEC. 

Brendan Ahern from KraneShares stated to me that all Chinese ADRs listed will end up on this list because no one of them can comply with audit requests. According to him, this is because Chinese law does not allow the auditor to submit their review to U.S. regulatory agencies.

Ahern pointed out that none of these companies have been delisted by the SEC. The SEC Chair Gary Gensler stated that the clock has started last year. Therefore, 2024 would be the earliest company can be delisted (after having elapsed three years).

U.S. companies that are listed in China have been forced to become more frequently dual-listed with Hong Kong because of the disputes. The last one year has seen a significant increase in the number of dual-listed Chinese companies. Alibaba, JD.com, Baidu, Bilibili, Trip.com, WeiboPlease see the following: NioThat’s it.

The KraneShares CSI China Internet ETFThe focus of KWEB, an international-listed Chinese Internet company, has been shifted as well. KWEB, which was listed 75% in the United States a year ago, is now 34% with the remainder in Hong Kong.

Ahern explained to me that Chinese companies had been suspicious of U.S. investment even before the Holding Foreign Companies Accountable Act.

He told me that “these companies are used to proxy for China” and said, They don’t always trade on the basis of fundamentals.