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

US-China relations

Zhang Shidongin Shanghai

Published: 9:00pm, 7 Jan 2021

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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.”

02:02

Chinese e-commerce giant Alibaba starts trading on Hong Kong stock exchange

The sentient was echoed by Ding Yifan, former deputy director and senior fellow of the Institute of World Development, Development Research Center of the State Council

“I think the US won’t be able to persist in this delisting thing, because it will bring more losses to American investors,” Ding said. “This is purely a decision made by people who don’t know the financial market at all. Perhaps Biden’s administration will rationally consider the gains and losses after taking office.”

Trump’s crackdown on US-listed Chinese companies has already made Hong Kong, another major offshore venue for fundraising by mainland firms, stand out. Hong Kong Exchanges and Clearing has now trounced Chicago-based CME Group, the owner of the world’s most diverse derivative exchange, as the most valuable bourse operator globally on optimism that more Chinese companies will flock to the city for secondary listings.

Some 217 Chinese companies are listed in the US with a total market capitalisation of US$2.2 trillion.

Alibaba, which chose New York over Hong Kong for its US$25 billion initial public offering in 2014, spearheaded the trend of US-listed Chinese companies coming back to the city for secondary flotations. The e-commerce juggernaut raised US$12.9 billion from the stock sale in November 2019 and the deal was followed by offerings from JD.com and NetEase in June last year, which raised combined US$6.5 billion. The trio has rewarded local investors with decent returns, with shares of three tech companies gaining at least 15 per cent since their debuts.

Could there be an exodus of Chinese tech stocks from US markets?

E-commerce firm Pinduoduo and search engine operator Baidu are among the biggest Chinese companies trading in the US that have not conducted secondary offerings in Hong Kong yet. Some 36 such companies listed on the New York exchange and the Nasdaq qualify for secondary offerings at this stage after the city overhauled the listing rules in 2018 to woo more tech firms, according to China Renaissance Holdings.

Trump’s heightened scrutiny will also affect some red-hot Chinese stocks trading in America, probably prompting them to turn to Hong Kong as the primary market. Electric vehicle maker NIO, XPeng and Li Auto are among US investors’ favourite bets that have been fuelled by China’s plan to cut emissions to zero by 2060 and surging sales of new-energy cars. NIO surged 12 fold last year, while XPeng has jumped 94 per cent since the August debut and Li Auto has surged 93 per cent since its listing in July.

With additional reporting by Rachel Zhang in Shanghai