These requirements may not be possible to meet for Chinese ADRs depending on how they are interpreted. The ownership aspect is especially noteworthy because it is commonly believed the PRC has stakes in businesses operating within China. The threat of delisting shares from U.S. exchanges should not be taken lightly by investors. Baidu, a large-cap internet search firm based in Beijing, has already floated the idea of delisting from U.S. exchanges willingly in order to bridge what the firm sees as a discounted market valuation due to China/U.S. trade tensions.⁴

Most recently, China has turned its attention back to solidifying its control of Hong Kong. This week, China’s Communist Party set in motion a “Hong Kong Security Law” that looks to ban “treason, secession, sedition and subversion.” Hong Kong pro-democracy protests had previously erupted in 2019 in response to an imposed extradition bill on Hong Kong by China; but Coronavirus preventative measures muted that movement in recent months. Now that the virus news is wadding a bit, Hong Kong is once again being pressured by the Chinese Communist Party. “Pro-democracy activists fear that China pushing through the law could mean “the end of Hong Kong” – that is, the effective end of its autonomy and these freedoms.”³

These three Chinese developments (Coronavirus blame, potential increase of foreign security regulation by the U.S., and Chinese reaching for increased Hong Kong control) increase the risk premium needed on related investments. Those investments include but are not limited to, direct Chinese ADRs, ETFs that hold these ADRs, as well as mutual funds that hold these ADRs.

In light of these ongoing events I have taken the opportunity to decrease my exposure to some of the investments outlined above and will continue watching to see how these situations works out.