Investors were in a downbeat mood to start the holiday-shortened week. The Nasdaq Composite (NASDAQINDEX:^IXIC) had fallen about half a percent on Tuesday afternoon as of 1 p.m. EDT, and other major market benchmarks were down even more sharply.
One thing that investors might not realize is that even though the Nasdaq is a U.S. exchange, it hosts plenty of stocks of foreign companies. Today, market participants started to worry again about Chinese stocks listed on U.S. stock markets, particularly in light of steps that Chinese authorities are taking in an effort to maintain their control over China’s economy and its role across the globe.
What China is doing
The Chinese government said it would tighten the guidelines under which its domestic companies can trade shares on overseas stock exchanges. In particular, investors can expect closer looks from regulators at Chinese companies seeking to do initial public offerings on exchanges outside China.
That will affect the internet industry in particular, because that’s an area in which the Chinese government has the greatest interest in keeping a tight rein. As Chinese internet companies get larger, the government doesn’t want to run the risk of their getting so big that they start to defy edicts from central authorities.
Why it matters to U.S. investors
Many people investing in the U.S. avoid foreign stocks in general. They’re more comfortable with companies that they’re more familiar with, and they like the investor protections that the Securities and Exchange Commission and other regulators provide.
It therefore can come as a shock to learn that some big indexes have plenty of international influence. The Nasdaq-100 Index in particular has a huge foreign contingent, largely because it consists solely of the largest non-financial companies whose shares are listed on the Nasdaq. Their national headquarters don’t play into the equation at all.
In particular, the Nasdaq-100 includes the following five Chinese stocks:
- JD.com (NASDAQ:JD), the online shopping company, which was down more than 5% Tuesday afternoon.
- Baidu (NASDAQ:BIDU), the internet search giant, falling nearly 5%.
- Disruptive e-commerce company Pinduoduo (NASDAQ:PDD), which dropped almost 7% in Tuesday afternoon trading.
- NetEase (NASDAQ:NTES), whose stock gave up almost 4% today despite the video-game maker’s usual resilience to downward pressure.
- Trip.com (NASDAQ:TCOM), provider of online travel services, down 3% Tuesday afternoon.
Now, it’s important not to overstate the importance China has over the Nasdaq-100. Add all five of these components together, and their total weighting in the index amounts to just over 1.5%. Chinese stocks, therefore, won’t make or break the Nasdaq on their own.
Nevertheless, China does play an increasingly important role in the growth of the global economy. For many years, Chinese GDP growth far surpassed what investors saw in other major economies. Anything that threatens to restrict investor access to the companies that were responsible for so much of that growth could be detrimental.
Keep an eye on China
China is a huge market for just about every major company in the U.S., and the actions the nation takes with its own domestic businesses have ramifications for the way it deals with their foreign competitors. With the situation in China continually evolving, investors simply can’t afford to ignore what’s happening beyond U.S. borders. Only by keeping abreast of the latest Chinese developments can you take timely action to protect your portfolio as necessary.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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