Alibaba tanks 10% and drives Chinese stocks lower after SEC says e-commerce giant faces potential delisting

• Chinese stocks moved lower on Friday after the SEC flagged Alibaba for a potential delisting.
• Chinese companies listed on US exchanges have until 2024 to comply with a new law that requires them to be audited by US-based accountants.
• "If we're in the same place two years from now," many companies "would be suspended," SEC Chairman Gary Gensler said earlier this year.

Alibaba stock tanked as much as 10% on Friday and led Chinese stocks lower after the Securities and Exchange Commission identified the e-commerce giant in a new batch of Chinese companies that could be subject to delisting from US exchanges if they don't comply with a new law.

The Holding Foreign Companies Accountable Act took effect on December 18, 2020. It requires the SEC to identify publicly traded foreign companies on US exchanges that will not allow a US auditor to fully inspect their financial books. The SEC ultimately has the power to delist the Chinese stocks if for three straight years they do not allow a US accounting firm to conduct an audit of its financial statements.

The SEC said Alibaba has until August 19 to submit evidence that disputes its identification of a Chinese company that hasn't fully opened up its accounting books to auditors. 

Whether China-based companies will comply with the new law remains to be seen, according to SEC Chairman Gary Gensler. "If we're in the same place two years from now," many companies "would be suspended," Gensler said earlier this year.

China has made some overtures to the US that it would allow some US audit reviews to prevent the delistings. That may not be enough, though, as the law requires all companies to be subject to an audit by a US-based accounting firm.

Earlier this week, Gensler said the SEC would not send accounting inspectors to China or Hong Kong unless Beijing agrees to complete audit access for Chinese companies that are listed on US stock exchanges.

There are now more than 200 Chinese companies that have been identified by the SEC for violating the HFCA law, and that could lead to big implications for investors if Beijing doesn't give auditors full access to company finances.