Investors in Chinese companies ought to take another look at their holdings, as the State Department just divulged the names of more than 1,100 Chinese subsidiaries that fall under the jurisdiction of an executive order that bans U.S. investment in companies the U.S. claims has ties to China’s military. Only a few darlings are likely to be found in U.S. investors’ portfolios.
It’s the most recent development related to an executive order signed by President Trump back in November that has created investor confusion about what subsidiaries and affiliates could be affected. That perplexity led the NYSE to backtrack earlier this month on whether it was delisting China Mobile [$CHL], China Unicom [$CHU) and China Telecom [$CHA]—companies it did ultimately decide to delist.
Collectively, brokers, index providers and fund managers have been scurrying to abide by the order—with index providers dropping companies like Cnooc and Semiconductor Manufacturing International in recent weeks to comply.
While hodler’s have until November to divest shares in these companies—some of which are part of the MSCI Emerging Market indexes—investors rushed to get out earlier out of fear about liquidity and in a bid to get compliant with the government action—and because investors would be barred from buying any of the stocks.
Most of the companies on the naughty lot aren’t publicly traded, however some are listed in Hong Kong or Shanghai. Only a short list are part of broad indexes like the MSCI Emerging Markets index, including Air Canada, China National Chemical Engineering Group, and China Railway Construction.
Cellphone and consumer technology company Xiaomi is also on the off-limits list, which means index providers and fund managers will likely jettison these companies—as they did others. Xiaomi’s shares dumped more than 10% overnight.
Most policy gatekeepers expect the incoming Biden administration to pause orders passed by the Trump administration after the election for review. While Eurasia Group’s Paul Triolo expects the administration to keep the order in place for now, it may constrain a number of terms and conditions—possibly even cutting out companies like Xiaomi if it decides the basis for adding the company was weak.
“But Trump’s move to weaponizecapital markets may permanently alter financial sector perceptions, making it harder, for example, for U.S. firms to win business in Asia that involves managing Chinese assets,” Triolo said. That may be undesirable news for the asset management industry, which has been trying to make headway in catering to Chinese investors.
In the big picture, Chinese companies aren’t that dependent on U.S. investors for capital. The real gut-punch could be to U.S. investors if they’re banned from investing in a broader range of Chinese companies.