US strengthens ban on Chinese military-linked firms as investors await index compilers’ fine-tuning moves
- The US government details the scope of November 12 executive order banning investment in 35 targeted Chinese military-related companies
- More fine-tuning in global stock or bond indices could follow the latest clarification on investment ban
The order applies to all transactions by “US persons” including individuals, institutional investors, pension funds, university endowments, banks, bond issuers, venture capital firms, private equity firms, index firms, and other US entities, including those operating overseas, Secretary of State Mike Pompeo said in a statement.
The clarification will ensure that US investors do not unknowingly support or contribute capital “to the development and modernisation of the People’s Republic of China’s military, intelligence, and security services”, according to Pompeo’s statement on Monday.
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“If specific stocks need to be banned or if they don’t meet requirements [of the indices such as MSCI], they still need to be taken out,” Gordon Tsui, chairman of Hantec Pacific and president of Hong Kong Securities Association. While this will impact asset allocation, “it will not be long-term as funds can adjust to that by investing in other stocks that suit them,” he added.
“Index compilers will be under pressure to readjust the components of their benchmarks,” said Ding Haifeng, a consultant with Shanghai-based financial advisory firm Integrity. ”It does not make sense if the exchange-traded funds are unable to buy shares of companies that are constituents of the indexes.”
The Trump administration added four companies including oil explorer China National Offshore Oil Corp to an initial list of 31 companies that included SMIC, Hikvision and phone carriers China Mobile and China Unicom.
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The world’s biggest money managers including BlackRock, Vanguard Group and Morgan Stanley Investment Management are among investors who own securities issued by the Chinese companies.
Shares of the targeted companies barely reacted to the news on Tuesday, as analysts said that the pessimism has already been priced in since the start of the US-China trade war more than two years ago and heightened tensions in the financial markets.
US lawmakers passed a bill this month that could lead to the delisting of the Chinese companies traded on the New York Stock Exchange or Nasdaq within three years, if they fail to allow the US to review their audits.
The Commerce Department earlier this month also added about 60 Chinese companies including SMIC to a list that will require American firms to request a licence to do business with them.
Additional reporting by Daniel Ren in Shanghai