The blacklisting is a party-pooper to an otherwise solid market run. The CSI 300 Index, which tracks the biggest firms on Shanghai and Shenzhen exchanges, has risen 19.4 per cent this year, outpacing major gauges in the US, Europe and Japan. Successive quarterly gains since March 31, at a cumulative 32.6 per cent, mean Chinese stocks are entering 2021 with the strongest tailwind since June 2015.

“A-share sentiment will likely stay rangebound for the rest of the year,” Morgan Stanley strategists said in a December 10 report showing a drop in its proprietary investor sentiment index. Near term, investors should pay attention to policy-tightening messages and potential escalation in US-China tension like the blacklisting event, they wrote.

“We are looking at this issue very closely,” said David Wong, a senior investment strategist in Hong Kong at AllianceBernstein, the US money manager with US$631 billion of assets globally. “We have to assume that these things continue for now, but we do find that there are many interpretations on how to look at such restrictions.”

Among the blacklisted firms (and their units), 25 are publicly traded in China, Hong Kong or the US. The largest is Hong Kong-listed China Mobile, which operates the world’s largest network with 947 million subscribers, at HK$907 billion (US$117 billion) in capitalisation.

State-controlled oil explorer CNOOC (HK$310 billion), telecoms operator China Unicom (HK$132 billion), chip maker Semiconductor Manufacturing International Corp (HK$267 billion) and surveillance-camera maker Hangzhou Hikvision (416 billion yuan) are some of the larger ones.

China eases rules, widens US$222 billion inbound path, offering the yuan as safe haven

The blacklist will force global investors with an eye on Chinese assets to adapt to the volatile US-China relations. The latest round of recalibration is the second major upheaval this year. The first, triggered by the Covid-19 pandemic, was so disruptive it forced S&P DJI to postpone its scheduled March rebalancing.

The largest companies have emerged from the pandemic stronger than others, increasing concentration risk in the market and indices. As growth stock outperformed the value segment, the transformation in the economy and investment universe will extend to index construction, according to Parametric, a unit of Eaton Vance Corp.

Two trends are likely to emerge, according to China Renaissance Securities. Blacklisted Chinese state-owned companies stand to lose out to their domestic private technology companies within a country index, or to rival companies in other markets within regional or global indices.

“The lists are mostly made up of industrial state-owned companies, making them the most vulnerable,” said Bruce Pang, head of macro and strategy research in Hong Kong. “It will be positive for other emerging markets stocks, because global funds could reallocate their investment in China to other markets, while also hedging against the political risk.”

Chinese companies with military ties included in major global securities indices, State Department says

Many companies identified by the US Department of State, including those banned under Trump’s executive order and other entity lists, are represented in major global stock or bond indices. One interpretation may be that the US pressure on larger companies like China Mobile, China Unicom and CNOOC may increase.

All told, China is too big to ignore or exclude. The country now accounts for 48 per cent of MSCI Asia Pacific ex-Japan by index weight, and over 58 per cent of its risk, according to Credit Suisse strategists. Until Trump vacates the White House, speed bumps and headwinds will prevail.

“The market’s reaction is negative, but investors are not too concerned just yet,” said Wong of Ample Capital. “People won’t decide not to invest in China, because China is the only place in the world with relatively good economic growth.”