About Chinese Concept Stocks

Chinese concept stocks refer to shares of companies whose core assets or revenue mainly come from mainland China. Broadly speaking, these companies use overseas listings as a way to attract foreign investment as part of China’s financial reform. Major overseas listing destinations currently include the Hong Kong Stock Exchange, the New York Stock Exchange, Nasdaq, the American Stock Exchange, the London Stock Exchange, Euronext, the Tokyo Stock Exchange, and the Frankfurt Stock Exchange. Some Chinese concept stocks listed on the NYSE, Nasdaq, and the American Stock Exchange trade in the form of American Depositary Receipts, or American Depositary Receipt/ADR, rather than ordinary shares. On September 19, 2014, Alibaba officially debuted on the New York Stock Exchange, becoming the largest IPO in US stock market history and the Chinese concept stock with the highest market capitalization.【wiki】

There are still a large number of Chinese concept stocks listed in the US, including established state-owned enterprises such as PetroChina, Sinopec, and China Life; nearly all major internet companies, such as Alibaba and JD.com; and EV makers such as NIO and XPeng. If you are optimistic about the future growth of these companies, you may consider investing in them. In addition to buying individual stocks directly, you can also invest through exchange-traded funds (ETFs) that focus on a specific theme.

Risks and Opportunities

When it comes to Chinese concept stocks, it is hard not to talk about the roller-coaster-like risks and opportunities they have presented over the past few years.

IPO subscriptions

Back when regulation was relatively loose, quite a few Chinese companies came to the US to go public. Participating in new IPOs does not guarantee a profit, but overall it has offered some return potential. Below are some IPO-related data points for Chinese concept stocks.

Despite heightened US-China tensions, performance looked pretty good.

So if you have a decent understanding of a Chinese company that is about to list in the US, participating in the IPO can be a good approach. For an introduction to IPO investing, see

Regulation

In May and December 2020, the US Senate and House of Representatives respectively passed the Holding Foreign Companies Accountable Act, or HFCAA, which was then signed into law by the president. The HFCAA provides that, beginning with the 2021 annual report, if a company cannot prove that it is not controlled by a foreign government, or if the Public Company Accounting Oversight Board (PCAOB) is unable to audit it for 3 consecutive years, then that company will be prohibited from listing on any US exchange.

This rule was widely seen as targeting Chinese concept stocks, because Chinese companies’ audit working papers are not disclosed to the US. Under this rule, many people expected Chinese concept stocks to keep falling or even be delisted. But apparently, most Chinese concept stocks were not affected much, and some even continued rising.

However, for internet giants, China’s tougher regulatory push in the second half of 2021 dealt a serious blow. Didi, Meituan, and Alibaba were fined one after another for antitrust or data security issues, and their stock prices kept sliding.

In 2022, against the backdrop of continued US-China tensions, the US also began taking more concrete action against Chinese concept stocks. On March 8, 2022, the US Securities and Exchange Commission (SEC) released the first batch of 5 Chinese stocks deemed at risk of possible delisting: BeiGene (BGNE), Yum China (YUMC), Zai Lab (ZLAB), ACM Research (ACMR, ACM Research), and Hutchmed (HCM). On March 30, 2022 US time, the SEC added 5 more Chinese companies to the provisional list under the Holding Foreign Companies Accountable Act (HFCAA): Baidu, iQIYI, Futu Holdings, CASI Pharmaceuticals, and Nocera.

Delisting

So what happens if Chinese concept stocks are delisted from the US market? Generally speaking, there are several possible paths after delisting from US exchanges (source: Phoenix Finance):

1. Going private. A major shareholder may launch a going-private offer to acquire all publicly traded shares, turning the listed company into a private company and then seeking to relist it in another market later. Usually, the going-private offer price is higher than the current market price, which can support the stock price. After the offer formally takes effect, the stock price often stays slightly below the offer price until the buyout is completed.

A classic example is Qihoo 360. After receiving the offer, its share price gapped up sharply. But at that point, the offer was only an intention, and there were still uncertainties and regulatory approvals ahead, so there was no guarantee the stock would not fall afterward. As the process moved forward, the company eventually reached a privatization agreement. Then came shareholder review and regulatory approval, and the stock price fluctuated based on expectations of whether the offer would succeed. After all approvals were obtained, the company was delisted. Later, 360 returned to the A-share market through a backdoor listing via Jiangnan Jiajie.

2. Listing on another market. For companies listed in both Hong Kong and the US, if they are delisted in the US, investors may be able to convert their shares into Hong Kong-listed shares and continue trading in Hong Kong.

For example, when Didi announced it would delist from the US market, the plan disclosed on its official website said that the US-listed shares would be converted for listing on another exchange, which I suspect would most likely be the Hong Kong Stock Exchange. To ensure trading is not interrupted, the company would first need to complete a successful Hong Kong listing, after which investors’ US-listed American Depositary Receipts (ADRs) could be converted into Hong Kong shares, and only then could the US delisting be processed. Because Hong Kong shares and US-listed ADRs can be converted freely, their prices are usually linked, and the difference between them tends to be smaller than the conversion cost. As a result, the conversion itself generally should not create major gains or losses. If this route is taken, investors may mainly need to bear the conversion fee. It is still unclear whether Didi would compensate investors if a large-scale conversion were to happen.

3. Moving to the over-the-counter market after delisting. If a company is temporarily unable to list elsewhere, then after being delisted its stock may move to the US over-the-counter market. Roughly speaking, you can think of this as somewhat similar to an A-share stock moving to China’s old third board after delisting. Because the OTC market has weaker liquidity and lower valuation levels than the main board, once delisting expectations appear, the stock price may come under pressure. If the company later performs well and finds another listing venue, the stock price may have a chance to recover, but that would be a longer-term story.

Luckin Coffee is one example. When delisting expectations emerged, the stock price collapsed, plunging 76% in a single day. But by the time it was actually delisted and started trading in the OTC market, the stock price was already at its low point. In other words, once the bad news was fully priced in, the stock rebounded after entering the OTC market.

A Turning Point

In late March 2022, China’s Financial Stability and Development Committee said after a special meeting that, regarding Chinese concept stocks, regulators on both sides were maintaining good communication, had made positive progress, and were working to form a concrete cooperation plan. There were also reports from the US side saying the two countries were communicating actively. Once this news came out, Chinese concept stocks, which had fallen to very low levels, began rebounding sharply. I also believe that although the two sides may continue drifting apart politically, capital markets will still move toward cooperation, because capital has no borders and everyone wants to make money.

Trading Platforms

US stock trading platforms

Many US stock trading platforms allow you to buy Chinese concept stocks directly, and doing so is not much different from buying any other stock. So I will not go into detail here. For a comparison of US stock trading platforms, see

I personally use Moomoo. The app feels very polished, and it offers a Chinese-language interface as well as Chinese customer support, which makes it especially friendly for Chinese users who are not very comfortable with English. Its technical analysis tools and research materials are also fairly comprehensive.

Hong Kong Stock Platforms

It is foreseeable that quite a few companies, either to reduce risk or because they cannot meet US regulatory requirements, may choose to voluntarily delist from US exchanges and instead list or pursue a secondary listing in Hong Kong. If you are still interested in investing in these companies, you can use a Hong Kong stock trading platform to invest in these Chinese concept stocks. Although the Hong Kong market still lags behind the US market in liquidity and scale, it remains relatively flexible.

Since most readers study and live in the US and likely hold most of their assets in US dollars, below is a comparison of how different US-based investing platforms handle Hong Kong stock trading. The data below was updated on 2021.9.14 and reflects information available at that time only.

  • Moomoo supports Hong Kong stock trading, with relatively low commissions and platform fees. It also supports margin trading and charges no currency exchange fee. No separate account is required; if you already have a US stock account in the app, you can directly enable Hong Kong stock trading. It also supports fractional-share trading. Overall, it is arguably the best platform for trading Hong Kong stocks among the options listed.
  • Interactive has slightly higher commissions and fees, but lower margin rates. However, it charges currency exchange fees and does not support fractional-share trading.
  • Charles Schwab and Fidelity have fixed commissions, making them more suitable for large trades. However, they do not support margin trading, charge currency exchange fees, and do not support fractional-share trading. Schwab also requires you to open a separate global account before you can trade Hong Kong stocks.
  • TD, Trade Up, and Webull do not currently support Hong Kong stock trading.

If you buy 1 lot of Tencent stock, which is 100 shares, the costs are as follows. (Real-time share price is for reference only.)

If you are interested in Hong Kong stock trading platforms, I personally recommend Moomoo. It is easy to open an account, supports both US and Hong Kong stocks, is convenient to use, and supports real-time two-way currency conversion.

Converting US-Listed ADRs to Hong Kong Shares

If you are concerned that Chinese ADRs may be delisted from US exchanges, you may consider converting them to Hong Kong shares in advance. On the Moomoo platform, here is what you need to prepare before converting a US-listed ADR into Hong Kong shares:

  • You must keep enough cash in your US stock account to cover the ADR-to-Hong Kong-share conversion fee.

    Conversion fee schedule: $650 per transaction processing fee + $17 per transaction routing fee + $5 per lot per transaction conversion fee (1 lot = 100 ADS; anything less than 1 lot is still charged as 1 lot).

  • Through the Hong Kong stock securities account of Moomoo Financial Inc., once the conversion is completed successfully, the Hong Kong shares will be deposited into the client’s Hong Kong stock securities account at Moomoo Financial Inc.

Once the preparation is complete, the client must submit the conversion request by email. Please send an email to [email protected] to notify Moomoo Financial Inc. of the ADR you want to convert. The email should include the following information (including the “Note” section):

  • Client information: account ID (Moomoo number), client name
  • Conversion request information: conversion direction: US stock to Hong Kong stock (currently only supports converting US-listed ADRs into Hong Kong ordinary shares), outgoing account number, incoming account number, number of shares to transfer out
  • Note: I acknowledge that the conversion fee is $650 per transaction processing fee + $17 per transaction routing fee + $5 per lot per transaction conversion fee (1 lot = 100 ADS; anything less than 1 lot is still charged as 1 lot)

For example: converting 206 shares of BILI.US into Hong Kong shares

  • Conversion fee: (anything less than 1 lot is still charged as 1 lot) 3 lots = $650 + $17 + $5×3, for a total of $682

My Personal Experience

Let me first share my own experience. Previously, I used the Moomoo app to buy a China consumer index ETF focused on Chinese concept stocks. Overall, I made a small profit. At the time, I mainly wanted to get a feel for investing in Chinese concept stocks, since I had previously mostly bought US stocks and ETFs. Later, however, as China intensified its crackdown on internet companies, the stocks kept falling, so I just held on and stopped making moves. More recently, China and the US have been in frequent talks and have gradually moved toward agreement on company audits, and Chinese concept stocks have also been recovering. I plan to wait for things to stabilize for a while before deciding whether to buy more.

This ETF includes several major companies in internet, auto, and retail, and they are all businesses I am relatively optimistic about. I really do not have the time or energy to study every company’s financial statements and future plans one by one, so I simply bought an ETF that looked reasonable to me. In general, I am still focused on long-term growth, and probably will not do any short-term trading in the near future.

PetroChina, Sinopec, and Shanghai Petrochemical said in their respective statements that they would apply to voluntarily delist their American depositary shares from US exchanges. Insurer China Life and aluminum producer Aluminum Corporation of China also said they would stop listing shares in the US, citing the administrative burden and costs of maintaining the listings. We also asked the Moomoo platform how such delistings might be handled if they happen. Their response was:

Dear customer, according to the announcement released by the listed company, it plans to delist the company’s American depositary shares from the NYSE. The last trading day for the depositary shares and options, as well as the delisting arrangements, will depend on upstream institutions and exchange arrangements. We are still waiting for further clarification.

Based on what we introduced earlier, there are generally several possible outcomes after delisting:

  • Voluntary conversion into Hong Kong shares: however, this option is not currently available for these five companies. For detailed steps and fees, please refer to: Converting US-Listed ADRs to Hong Kong Shares
  • Voluntary buyback: these five companies buy back the shares held by investors and then delist after going private
  • Delisting, after which the shares investors hold move to the OTC market for trading, potentially with weaker liquidity and no options trading support: for example, Didi at present

Of course, you can also open a Hong Kong stock account, sell your US-listed shares of these companies, and immediately buy the corresponding Hong Kong-listed shares instead.

Summary

For many Chinese investors, there is some familiarity with Chinese companies and the direction of Chinese policy, so investing in Chinese concept stocks may feel more intuitive and may also offer an informational edge. However, before investing, you should still carefully evaluate both the risks and the opportunities. If you are not especially prepared to actively trade short term, it is generally better to focus on long-term development and make stock investment decisions based on your assets, risk tolerance, and cash flow situation.

Of course, if you are not optimistic about the future of Chinese companies to begin with and hold a pessimistic view of US-China relations, then I would not recommend blindly jumping in just to try to buy the dip.