US investors holding US$1 trillion of Chinese stocks in a spot of bother as Trump’s investment ban nears

US investors holding a combined US$1 trillion of Chinese stocks may be forced to trim their portfolios after Trump endorses orders to curb investments

Half of the holdings are in the form of ADRs and institutional investors account for 86 per cent of the exposure to Chinese equities, according to Goldman Sachs

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US President Donald Trump leaves office on January 20, but he has targeted Chinese companies with a slew of executive orders and sanctions. Photo: EPA-EFE

Published: 9:00pm, 7 Jan 2021Updated: 7:41am, 8 Jan 2021

There are less than two weeks left in US President Donald Trump’s term, but his endorsement of a deluge of bills and executive orders in his final few days in office is causing chaos for American investors who hold about US$1 trillion of stocks in Chinese companies.

US investors from hedge funds to individuals will be banned from buying shares of 35 Chinese companies with ties to the military starting next week and existing holdings will have be liquidated by November. Some 200-plus Chinese companies trading in New York and the Nasdaq may face delisting, should they not allow American regulators to review auditing results. And now the White House is said to be weighing a move to ban stock investments in Alibaba Group Holding, the owner of the South China Morning Post, and Tencent Holdings, whose combined market capitalisation of US$1.4 trillion is twice as big as Spain’s stock market.

That will probably cause a shake-out in the portfolios of Chinese stocks owned by US investors. Half of the US$1 trillion holdings are held via American depositary receipts (ADRs), and mutual funds and hedge funds account for 86 per cent of the total exposure, according to data by Goldman Sachs.

US investors held 62 per cent of Alibaba’s ADRs as of January 3 and the US ownership of Tencent’s US-traded surrogate securities was 87 per cent, according to data compiled by Bloomberg.

While the executive order banning investments in military-linked Chinese companies will take effect soon, the drama surrounding the delisting of three Chinese telephone carriers from the New York Stock Exchange (NYSE) has baffled US investors.

This week, the NYSE first reversed its earlier decision to boot out China Telecom, China Unicom and China Mobile before saying that it would still proceed with the move following a clarification from the Treasury Department.

A US fund-management firm that invests in Chinese stocks, which did not want to be identified, said that it was still assessing the implication and has not started adjusting its portfolio, given the recent chaotic and confusing headlines on the delisting issue. There is still a chance that the restrictions on China investments will be eased or revoked, with President-elect Joe Biden taking office on January 20, it said. Although Biden is expected to maintain a tough stance on China, his policies are likely to be more predictable.

“Amid the global economic downturn, American investors who invest in Chinese companies will, to a considerable extent, lose the upside of the Chinese market, which will bring huge losses to their investment returns,” said Wang Huiyao, president of Centre for China and Globalization, a Beijing-based think tank. “Trump’s move shows that he doesn’t care about the interests of American enterprises and investors at all. To me Beijing doesn’t even need to respond to this, because this is a matter that will largely hurt the interests of the US itself.”