Alibaba Stock Hits Record Low in Hong Kong Amid Delisting Concerns. Here’s What to Know.

Alibaba
‘s Hong Kong-listed shares (ticker: 9988.H.K.) dropped 2.5% Thursday to their lowest level since the company launched its secondary listing in Asia in 2019. The company’s U.S. stock (BABA) rose 1.5% Thursday, having fallen near 4% Wednesday. 

The latest development on the regulatory front concerns variable interest entities (VIEs)—a corporate structure used by Alibaba and other Chinese companies to list offshore and sidestep Beijing’s rules concerning foreign investment. 

Must read: Beijing Could Add Pressure to U.S.-Listed Chinese Stocks. What It Means for Investors.

China is planning to ban companies from going public overseas using the VIE structure, Bloomberg reported Wednesday, citing anonymous sources, though Hong Kong would be an exception subject to regulatory approval. 

The plans could be finalized as soon as this month, according to the report, and may require companies already listed overseas via VIEs to revamp ownership structures and be more transparent. This could mean that the most sensitive companies—for instance, Alibaba—may be required to delist in the U.S.

China’s securities regulator has denied Bloomberg‘s report.

VIEs are also under scrutiny from U.S. regulators. Gary Gensler, the chair of the Securities and Exchange Commission, has warned that U.S. investors may not fully realize the nature of their stakes in U.S.-listed Chinese securities. American investors who buy Alibaba stock in fact own a stake in an offshore shell company that has a contractual relationship with the Chinese operating entity. 

Shares in Alibaba have collapsed by more than 45% this year amid a regulatory crackdown by Beijing on the country’s tech sector and, more recently, signs of slowing growth at the company. The U.S.-listed stock is trading at its lowest level since spring 2017.

While there remain reasons to be bullish on Alibaba, this year has proved a wild ride for investors. Some experts have suggested that the worst of the regulatory crackdown may be over—but that hasn’t stopped investors fretting about the future of Alibaba.

Not everyone agrees that Chinese regulatory pressure is done and dusted.

In a report published Thursday, analysts Ernan Cui and Thomas Gatley at research group Gavekal Dragonomics outlined why they believe “China’s regulatory crackdown on internet companies is far from over.”

The team at Gavekal note that much of Beijing’s crackdown has focused on data security, including how U.S.-listed companies like Alibaba—which hold personal data on millions of Chinese citizens—may be beholden to American regulators.

“For all the concern regarding data security, there is still not a lot of clarity on what practices regulators are worried about,” Cui and Gatley said. “Government agencies are also developing new areas of regulatory focus whose impact will not be clear for some time.”

Gavekal’s research suggested that while the initial antitrust investigations against China’s tech sector weren’t disastrous, legislative and bureaucratic structures to regulate competition are increasing in power and scope.

With Beijing viewing internet regulation as essential to its long-term governance, companies like Alibaba have a long, and growing, list of responsibilities spanning personal data protection and censorship, according to Gavekal. And in order to be better-placed to avoid the scrutiny of regulators, companies will need to take steps to satisfy regulatory demands that are nebulous in nature, the analysts said.

“The risks are not receding,” Cui and Gatley said. “Investors waiting for a regulatory ‘all clear’ for the internet sector will continue to be disappointed.”

Write to Jack Denton at jack.denton@dowjones.com