Amidst the global artificial intelligence boom, Chinese AI stocks are increasingly gaining attention. Not only does China have AI technology that is on par with technology in the US - from cutting-edge large language models (LLMs) to self-driving robotaxis - but it also has a vast domestic user base and a government providing strategic support.
But what are the risks associated with investing in Chinese AI stocks? Let’s take a look at the intricacies of this area of the market and what investors can do to mitigate risks and position themselves to capitalize on the growth of the market.
Delisting Risks
Investing in Chinese AI stocks involves a differentiated set of risks that go beyond typical emerging market volatility. One risk is in relation to the potential for delistings. This is particularly relevant for Chinese companies that are listed on US exchanges such as the New York Stock Exchange (NYSE) and the Nasdaq as American Depositary Receipts (ADRs). Currently, the Holding Foreign Companies Accountable Act (HFCAA) allows the US Securities and Exchange Commission (SEC) to delist foreign companies that fail to allow the Public Company Accounting Oversight Board (PCAOB) to fully inspect their financial auditors.
This risk came into focus in the first half of 2022 when the SEC put together a list1 of US-listed Chinese companies facing a potential delisting under the HFCAA (companies that used an audit firm headquartered in mainland China or Hong Kong that the PCAOB had determined it was unable to fully inspect). This list - which grew to over 150 companies - included major well-known businesses like Alibaba, Baidu, JD.com, and NIO. Being placed on this list meant that the companies were on the "clock" for an eventual delisting (initially three consecutive years of non-compliance, later shortened to two), which led to significant stock price volatility at the time. Thankfully, the PCAOB and Chinese regulatory authorities reached a landmark agreement later that year that granted the PCAOB the complete and unobstructed access required to inspect and investigate registered audit firms in mainland China and Hong Kong, so the Chinese companies were not forced to delist from the American exchanges.
It’s worth pointing out that it’s not just US regulatory action that is a risk here; crackdowns from Chinese regulators also need to be considered. In the past, the Chinese government has implemented sudden, severe regulatory crackdowns on certain companies and put pressure on them to delist from US exchanges.
A good example here is rideshare company Didi. It listed on the NYSE via an IPO in mid-2021, however, just days after its IPO, the Cyberspace Administration of China (CAC) launched a cybersecurity review into the company, citing national security concerns over the massive amount of user and geographical data the company collects. As a result of this review, Chinese regulators pressed Didi's executives to devise a plan to delist from the NYSE. And less than six months after its IPO, the company announced its decision2 to delist from the NYSE and pursue a listing on the Hong Kong Stock Exchange (HKEX) instead.
Now, there is a relatively easy way to mitigate US delisting risks and that is to invest in the Hong Kong-listed securities of Chinese companies instead of the US-listed securities. If a US listing were to be delisted under the HFCAA, an investor who owned the Hong Kong stock would still have a security trading on a major, regulated exchange, largely preserving the value and liquidity of the asset.
Corporate Structure Risks
Another risk to consider is in relation to the corporate structures that Chinese companies use to bypass foreign ownership restrictions and the heavy influence of the Chinese government. Specifically, the Variable Interest Entity (VIE) structure, which is used by the likes of Alibaba, Tencent, and PDD Holdings for their US listings.
The important thing to understand about VIEs is that with these structures, US investors do not directly own equity in the core operating companies in China. Instead, they own shares in an offshore shell company that has contractual agreements with the underlying Chinese operating entity. Additionally, the legality of the VIE structure has never been explicitly confirmed by Chinese authorities. So, there is a risk that the Chinese government could declare these contracts invalid, potentially wiping out the value of the VIE shares.
This is obviously a material risk for those investing in Chinese AI stocks. However, one way around it is to focus on companies that are listed in China on the Shanghai Stock Exchange and H-shares on the Hong Kong Stock Exchange (these are the stocks of companies incorporated in mainland China that have been approved by the Chinese regulator to list in Hong Kong).
Data Credibility Risks
Some investors also see data credibility as a risk in this area of the market. In the past, academic research - such as the paper “Chinese Companies, Earnings Management and Accounting-Based Benchmarks" by Pei Yang and Mark Mulcahy - has shown that Chinese firms have historically had strong incentives to manage earnings to meet specific regulatory benchmarks. Meanwhile, in recent years, there have been some high-profile fraud cases in China. One example here is Luckin Coffee3. In 2020, it admitted that its former COO and other employees had fabricated RMB 2.2 billion (approximately US$310 million) in sales revenue in 2019.
It should be noted that the agreement between the PCAOB and Chinese regulatory authorities has significantly reduced the risk of fraudulent accounting in US-listed Chinese companies. The fact that an audit firm could be subject to a thorough PCAOB inspection and investigation tends to act as a huge deterrent against potential fraud. However, risks remain for Chinese companies that do not have US listings. Therefore, it is sensible to take a diversified approach when investing in Chinese stocks, spreading capital out over many different companies to reduce stock-specific risk.
Geopolitical and Regulatory Risks
Of course, with Chinese AI stocks, there are many geopolitical/regulatory risks - related to the ongoing tension between the US and China - that are hard to avoid. With the two countries competing for tech dominance, investors need to be prepared for trade wars, tariffs, sanctions, and other complex scenarios. Looking ahead, it’s possible that we could see the US implement restrictive policies targeting specific Chinese technology companies. This could limit these companies’ ability to transact with US customers or suppliers.
As an example, a US lawmaker4 recently proposed phasing out Chinese-made LiDAR sensors in self-driving cars and critical infrastructure in the US amid warnings that these sensors could be hacked and disabled from space during a conflict. If this bill was to be passed, it could negatively impact a company like Hesai Group, which is a global leader in LiDAR systems and has partnerships with GM, Ford, and several US autonomous vehicle companies.
Another risk to consider here is the unpredictable nature of Chinese regulations. Unlike in Western markets - where there is generally a predictable legal and regulatory framework - regulatory changes and crackdowns in China can be sudden and arbitrary, often without clear advance warning or transparent justification. We saw this back in 2020 and 20215 when the government suddenly cracked down on tech, gaming, and education companies in an effort to restructure the economy towards Beijing’s priorities. This wiped out hundreds of billions of dollars in market value and fundamentally reset the rules for Chinese businesses.
Investors should also be aware that with Chinese State-Owned Enterprises (SOEs), the Chinese government is the ultimate controlling shareholder. As a result, these companies may make investment or operational decisions that prioritize the interests of the Chinese state over the interests of minority foreign shareholders. This is a very different setup to Western governance models where the primary legal duty of management is to maximize shareholder value. And it can present problems for foreign minority shareholders.
Potentially Мinimizing the Risks
So overall, there are many risks to consider when investing in Chinese AI stocks. From potential delisting risks to risks around VIE structures, there are a lot of unique issues to be aware of.
The good news is that many of these risks can be mitigated. By taking a diversified approach to Chinese AI stocks and focusing on Chinese and Hong Kong-listed securities instead of US-listed ADRs, investors can significantly reduce the risks associated with these stocks and potentially participate in the growth of the Chinese AI industry.
Footnotes:
1Reuters, SEC adds China's JD.com to list of over 80 firms facing delisting risk, as of May 5, 2022
2CNBC, Less than 6 months after its IPO, China’s Didi says it will delist from the New York Stock Exchange, as of December 2, 2021
3BBC, China's Luckin Coffee sacks bosses amid accounting scandal, as of May 13, 2020
4Yahoo News, US bill seeks phase-out of Chinese sensors in self-driving cars, after space hack fears, as of December 12, 2025
5Al Jazeera, What’s behind China’s Big Tech crackdown and what does it mean?, as of November 13, 2020
