HutchMed, the pharmaceutical unit of tycoon Li Ka-shing ’s flagship CK Hutchison Holdings , led declines among four Hong Kong-listed stocks on Friday after being named in a list of foreign companies liable to US accounting inspection law. HutchMed’s shares plunged by as much as 16 per cent to at least a 12-month low of HK$24.25 before closing 9.5 per cent lower at HK$26.30, tracing the 15 per cent decline overnight in New York. Yum China Holdings , which operates the KFC and Pizza Hut fast food chains in China, declined by as much as 12 per cent in Hong Kong, after its American depositary receipts (ADRs) fell 15 per cent in New York. The stocks were the first of 270 identified by the United States Securities and Exchanges Commission (SEC) on a list of New York-listed companies liable to the Holding Foreign Companies Accountable Act (HFCAA), which took effect on December 18, 2020. Under the law, foreign companies may be delisted if they fail to submit their audit papers to a US accounting oversight body for three consecutive years. The knee jerk reaction to the latest administrative action underscores how fragile investor sentiments are, amid a global surge of the Covid-19 pandemic’s Omicron variant, as well as the war in Ukraine, analysts said. The reason these companies were identified by the SEC was because they were the first to file their 2021 annual reports, China Renaissance said in a report after the New York rout. Who’re you calling a cheat? China rebuts US fraud claim with overture “We expect renewed regulatory uncertainty to dampen investor sentiment and potentially remain an overhang on Chinese ADR valuations,” said Renaissance’s analyst Bruce Pang. The latest sell-off rekindled fears of a mass delisting of US-listed Chinese stocks, estimated at US$1.3 trillion in combined market capitalisation. Already, several Chinese companies including China Mobile and China Telecom had been forcibly delisted from New York, albeit the results of a different regulation. The overhang may prompt more companies like the electric-car maker NIO – which began trading in Hong Kong yesterday – to seek a secondary market for trading their stocks, Pang said. Could there be an exodus of Chinese tech stocks from US markets? The SEC approved a framework in December to determine which US-listed Chinese companies fail to fully allow auditing inspection and, therefore, will be delisted from American capital markets. It will allow the Public Company Accounting Oversight Board’s (PCAOB), a non-profit entity that deals with accounting issues of public companies, to determine whether a delisting process needs to be triggered. “This is an expected move under the HFCAA after the PCAOB published last December the list of mainland China and Hong Kong-based auditors which they cannot fully inspect,” said Chen Weiheng, partner and head of China practice at law firm Wilson Sonsini. “The first five companies named to the provisional list of issuers identified under the HFCAA filed their annual reports over the last few weeks. They are audited respectively by the China entities of the Big Four accounting firms and BDO China, which were among the auditors determined by the PCAOB that cannot be fully inspected,” said Chen. For Yum China, the move may be much ado about nothing, as it had already foreshadowed a plan to delist its ADRs from New York in 2024, “unless the [HFCAA] is amended to exclude the company, or the PCAOB is able to conduct a full inspection of the company’s auditor during the required time frame,” according to its filing to the Hong Kong exchange . Under Chinese law, the China Securities Regulatory Commission (CSRC) is empowered to act as the bridge to provide Chinese auditing papers to foreign oversight agencies such as the PCAOB. The Chinese regulator has warned against security regulation being “politicised” amid wrongdoings by “some forces”, reiterating its commitment to communicate with the PCAOB in making Chinese auditing papers available. Does Trump want to fence off Wall Street from Chinese firms? For now, the companies on the SEC list are bearing the brunt of the sell-off. BeiGene, which develops immuno-oncology drugs, closed 4.9 per cent lower after plunging by as much as 11.3 per cent earlier in Hong Kong, tracking its 16.6 per cent tumble overnight. “We have been taking action; evaluating, designing and pushing forward extra-business processes since the passage of the HFCAA to meet related requirements,” BeiGene said, adding that it hopes to maintain its listing status in New York, Hong Kong and Shanghai. “The related work is actively advancing.” Zai Lab, a Shanghai-based developer of drugs for infectious diseases, plummeted by as much as 16.5 per cent, after its ADRs retraced by 23 per cent last night. It closed 6.3 per cent lower in Hong Kong on Friday. “The provisional identification does not mean that the company is about to be delisted by the SEC from Nasdaq,” Zai Lab said in a statement to the Hong Kong exchange, adding that it is hiring an independent accountant to meet the PCAOB’s requirements. “Delisting may only occur under the HFCAA if, for three consecutive years (or two consecutive years if the Accelerated HFCAA is passed), the company uses an auditor that cannot be inspected by the PCAOB.” ACM Research, which produces electroplating equipment used in the semiconductor industry, ended 5.4 per cent lower on Friday, after plunging as much as 15.8 per cent in Shanghai. It came after its ADRs fell almost 30 per cent. ACM did not immediately respond to a request for comment. Chen at Wilson Sonsini expects the SEC to add more Chinese companies to the list as more US-listed Chinese companies file annual reports in the coming months, unless CSRC and SEC reach agreement on audit inspection arrangements. CSRC vice-chairman Fang Xinghai said that China and the US were making progress in coordinating regulations governing Chinese companies listed in New York and there could be a “positive surprise” by June or earlier, Reuters reported on January 29.