The S&P/BNY Mellon China Select ADR Index, which tracks the American depositary receipts for 56 Chinese companies, fell 2.9% Thursday, bringing it to levels last recorded in early July of last year. That underperformed a 0.9% pullback in the S&P 500.
Alibaba Group Holding Ltd., the most valuable member of the China Select index, fell 3.9% to close below $200 for the first time since May 2020. The tech-heavy gauge, which also includes e-commerce rivals JD.com Inc. and Pinduoduo Inc., as well as electric-car maker NIO Inc., has now retreated 36% from a mid-February record high.
U.S.-listed Chinese stocks have come under fresh pressure in recent days, after China’s government launched a cybersecurity probe into the newly listed Didi Global Inc., and said it would tighten rules for companies that are listed abroad or are seeking to sell shares overseas. The actions add to a clampdown on China’s tech sector, which has already focused on issues like anticompetitive behavior and financial stability.
Chinese authorities are working to revise longstanding rules governing variable-interest entities, or VIEs, The Wall Street Journal reported. Many Chinese tech companies, including Alibaba and Didi, use such corporate structures to get around restrictions that disallow foreign investments into companies in technology, media and other sensitive industries.
New rules on VIEs may restrict future listings and it isn’t clear how companies whose depositary receipts already trade in the U.S. could be affected, said Tan Eng Teck, a senior portfolio manager at Nikko Asset Management.
"When you have such uncertainty, it becomes a big issue," he said.
The Didi probe has raised broader concerns about how tech companies handle data, said Dave Wang, a portfolio manager at Nuvest Capital in Singapore.
"Investors have to be selective. Some [companies] will ride through it better, while some will struggle," said Mr. Wang, who is invested in Alibaba.
Numerous U.S.-listed Chinese companies, including Alibaba, have also gone public in Hong Kong, partly as a hedge against losing access to American markets. The Securities and Exchange Commission has sought access to the audit papers of Chinese groups with U.S.-traded stocks and a law passed last year means three years of noncompliance could lead to delistings.
The recent slew of regulatory action will spur more Chinese companies with ADRs to seek listings in Hong Kong or mainland China, said Eddy Loh, senior investment strategist at Maybank Group Wealth Management in Singapore, especially those operating in sectors that have access to sensitive data.
"The [Chinese] government has expressed concerns over the release of information and the implications of national security. It is an indication to the companies to please come back," he said.
Both Mr. Loh at Maybank and Mr. Wang at Nuvest said they see some buying opportunities, given lower valuations and because the tech companies will remain key to the Chinese economy.
"This is definitely not the end of Chinese big tech," said Mr. Wang.
Mr. Tan at Nikko was more cautious. "A wait-and-see attitude might be better at this point," he said.
Write to Chong Koh Ping at firstname.lastname@example.org