Restricting US capital flows into China could impact global markets, analysts warn

Proposals to restrict US capital flows into China amid an ongoing trade war could impact Chinese firms listed on global stock exchanges, analysts say

White House discussions about limiting portfolio investments in China could signal ‘bigger moves’

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Chinese companies listed on Hong Kong’s stock exchange may be hit if the US pushes ahead with economic sanctions. Photo: Bloomberg

Published: 7:45pm, 2 Oct 2019Updated: 9:18am, 3 Oct 2019

Proposals to restrict United States capital flows to China could have wider ramifications on Chinese firms listed on global stock exchanges, analysts have warned, potentially roiling world financial markets amid concern the China-US trade war could turn into a full-blown capital war.

Media reports last week suggested the Trump administration was looking into two measures to restrict the flow of US capital to China, including delisting Chinese firms from US stock exchanges and prohibiting US government pension funds from investing in bond and equity markets.

Sean Darby, chief global equity strategist at brokerage Jefferies, said on Monday that the proposals were “far more draconian than the sanctions imposed on Russia” following its annexation of Crimea, and would “ultimately undermine the US capital markets”. In 2014, the US imposed sanctions on Russia by targeting listed companies, entities, exports and individuals close to the government.

Darby said that the potential economic sanctions on Chinese companies might lead to the closing of the American depository receipt (ADR) market, where instruments representing a share in a foreign stock can be traded. The ADR market capitalisation is more than US$860 billion and Chinese firms make up 90 per cent of the market cap of all outstanding ADRs, according to the report by Jefferies.

If the US takes action then I don’t think it would be limited to ADRs listed in the US, but would apply to Chinese stocks listed anywhere

David Webb

But analysts have warned the impact could go beyond US ADRs. Chinese companies listed on Hong Kong’s stock exchange may be hit if the US pushes ahead with economic sanctions, said David Webb, a Hong Kong-based corporate governance activist who runs Webb-Site.com, citing the example of Russian aluminium giant Rusal.

In April 2018, the US Treasury ordered American investors to divest their shares in Hong Kong-listed United Company Rusal on the grounds it was controlled by Oleg Deripaska, an oligarch with close connections to the Russian government. The sanctions caused the Hong Kong-listed stock to crash, forced its exclusion from major stock indices, and prevented dealers quoting prices of the company’s stock or bonds, with international rating agencies withdrawing their ratings of the firm.

“If the US takes action then I don’t think it would be limited to ADRs listed in the US, but would apply to Chinese stocks listed anywhere,” Webb said.