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’

China economy

Amanda Lee

Published: 7:45pm, 2 Oct 2019

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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.

It was inconsistent for Washington to complain about subsidies to state-owned enterprises and protections from foreign firms, while allowing American citizens to invest in the same enterprises via global stock markets, he added.

In a lengthy post published on LinkedIn on Tuesday, Ray Dalio, the billionaire founder of the world’s biggest hedge fund Bridgewater Associates, said the proposed step of limiting American portfolio investments in China made him wonder if the US was “inching toward bigger moves”.

The US Treasury said in a statement at the weekend there are no plans to stop Chinese companies listing on US exchanges “at this time”, but concerns are growing among investors.

China - the largest holder of US Treasuries - could retaliate by dumping US bonds, which would have “terrible consequences”, Dalio warned.

“In any case, from not having to worry about such things in the past, now all market participants need to worry about them,” Dalio wrote.

Exerting maximum pressure and even seeking the forced decoupling of China-US relations will harm the interests of Chinese and American companies and people

Geng Shuang

Beijing has been stressing that a decoupling between the US and China would not be mutually beneficial.

“Exerting maximum pressure and even seeking the forced decoupling of China-US relations will harm the interests of Chinese and American companies and people, create turmoil in financial markets, and endanger global trade and economic growth,” Chinese Foreign Ministry spokesman Geng Shuang said at a daily news briefing on Monday. “This does not accord with the interests of the international community.”

For China, the shift of the trade war the US into conflicts over currencies and capital has always been a possibility since it began in July last year. In a report published by Renmin University in September last year, researchers warned that China needed to stay alert and ready for currency, capital and economic warfare, highlighting the possibility that Washington may force its companies to exit their investments in Chinese markets and impose sanctions on Chinese companies through different channels.

Additional reporting by Reuters

This article appeared in the South China Morning Post print edition as: u.s. capital plan ‘may hit global markets’

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