Archegos blow-up won’t trigger Lehman 2.0, not culprit of US-listed Chinese stock rout
Published: Mar 30, 2021 08:48 PM
Wall Street Photo: AFP

Wall Street Photo: AFP

The blow-up of Archegos Capital Management, a hedge fund that reportedly has heavy holdings of US-listed Chinese stocks including Baidu and Tencent Music, seems to have set off a rout in Chinese firms floated on the US market.

But market watchers said it's not that simple, and they dismissed concerns of another bankruptcy like that of Lehman Brothers, almost synonymous with the 2008 financial crisis, as a consequence of the implosion of Archegos.

The hedge fund is believed to have inflicted heavy losses on multiple investment banks. 

Analysts identified the US securities regulator's adoption of measures that would delist foreign firms for failing to comply with US auditing standards as the culprit causing the rout of US-listed Chinese shares.

The past week was arguably one of the darkest periods for multiple US-traded Chinese stocks, with shares of Baidu, Tencent Music, online education platform Genshuixue, and video-streaming service iQiyi taking a beating.

The S&P/BNY Mellon China Select ADR Index, a tech-heavy gauge tracking American depositary receipts (ADRs) for 48 major US-traded Chinese firms including Alibaba, and Nio, fell 6.4 percent on March 24, down 23 percent from its record high on February 16.

Catastrophic losses at Bill Hwang's family office Archegos Capital Management, which reportedly put Wall Street banks including Nomura and Credit Suisse in hot water, have been attributed to the decline in the ADRs of Chinese firms, as some Chinese tech stocks were among his heaviest bets.

Both Credit Suisse and Nomura, believed to be Hwang's brokers, warned investors on Monday of "significant" losses they may face after defaults on margin calls by an unidentified US hedge fund client. Credit Suisse's shares tumbled 11.5 percent on Monday while Nomura's stock shed 14.07 percent. 

The heavy losses confronting Wall Street banks, reminiscent of the collapse of Lehman Brothers, stoked fears of another global financial meltdown. 

"It's not so bad that Lehman's collapse will repeat itself," Wu Jinduo, head of fixed income at the research institute of Great Wall Securities, told the Global Times on Tuesday.

Wu said that the recent turbulence in US-traded Chinese stocks was due to the US Securities and Exchange Commission (SEC)'s March 24 announcement of its adoption of interim final amendments to implement the Holding Foreign Companies Accountable Act (HFCAA), which has had a big impact on listed Chinese companies.

With the move hammering Chinese firms' ADRs as a whole, long positions in these stocks, amplified by margin loans, would inevitably result in a fiasco, she said.

The SEC's move set off a chain reaction, Yu Shek-lun, research manager of Valuable Capital, an online brokerage firm in Hong Kong, told the Global Times. 

Yu said that the HFCAA put pressure on Chinese companies listed in the US, with the resultant plunges triggering the hedge fund's blow-up and prompting other funds that held these ADRs to join the sell-off.

Financial markets often sell off merely on concerns of possible problems, Yu said, and the valuations of the best Chinese listed companies will recover after the market has calmed down. 

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