A US ban on American investors holding shares in companies with suspected ties to China’s military sent stocks tumbling on Friday and threatened to create a host of compliance problems for global investors.
State-run China Telecom fell as much as 10.4 per cent and rival China Mobile as much as 6.3 per cent in Hong Kong following the executive order from US president Donald Trump, which raised questions about how investors would deal with existing stakes in the widely held companies. The New York-listed stocks of both telecom groups also fell sharply after the announcement.
“They are mainstay index members of pretty much any index which has either passive or active tracking,” said Andy Maynard, a trader at China Renaissance, adding that compliance with the order would be “incredibly difficult”.
The measure will bar US citizens or companies from carrying out new transactions in shares of more than 30 companies that the Pentagon has said facilitate Chinese military activity and pose a national security threat.
The ban comes into effect on January 11, while investors with existing stakes in the targeted companies would have until November 2021 to divest them.
Mr Maynard said if the order remained in force after the new administration of president-elect Joe Biden took over, it would cause a “fairly big dislocation” as portfolios were forced to diverge from benchmarks to comply by next November.
Analysts Dan Wang and Thomas Gatley at Gavekal Dragonomics wrote in a note on Friday that the order could face legal challenges, weak implementation or even reversal by Mr Biden once he is inaugurated. But they warned that “should uncertainty regarding the order persist, however, MSCI will likely remove the firms from their indexes”.
“More broadly, however, the move is a sign that Trump might use his remaining two months in office to attack more Chinese interests via executive order,” they added.
One portfolio manager with a global asset management firm in Hong Kong said the impact for stocks named in the Pentagon’s list would ultimately be minor since the shares would probably find willing buyers even in the absence of US investors.
But he warned that the real pain would be felt by US asset managers, investment banks and exchange traded fund providers, which could be forced to divest from their existing holdings in those stocks.
“Active fund managers, they’re the ones who are going to have the more significant penalty . . . they have more invested in single-stock names,” he said. “This will ultimately lead them to consider alternatives to these stocks.”
While Mr Biden would have the power to rescind Mr Trump’s order when he assumed office in January, analysts warned the new administration would be unable to do so without appearing soft on China in an increasingly hawkish Washington.
“If I were Biden’s adviser, I’d say: ‘Don’t touch that thing’,” said Alicia García Herrero, chief economist for Asia Pacific at Natixis.
“You’ve got all the time in the world to sit with China and say: ‘Yes, Trump was really mean — but this is what I want from you now’,” she added.