A U.S. ban on American investors holding stakes in companies suspected of having ties to the Chinese military dropped shares on Friday, threatening to create a number of compliance issues for global investors.
State-owned China Telecom fell 10.4 percent and competition to China Mobile 6.3 percent in Hong Kong after U.S. President Donald Trump issued orders on how investors would deal with existing holdings in the widespread companies. The shares of both telecommunications companies listed in New York also fell sharply after the announcement.
“They are major index members of pretty much any index that has either passive or active tracking,” said Andy Maynard, a trader with China Renaissance, adding that keeping the order would be “incredibly difficult”.
The move will prevent U.S. citizens or companies from entering into new transactions in stocks of more than 30 companies that the Pentagon has claimed to facilitate China’s military activities and pose a national security threat.
The ban will come into effect on January 11, while investors with existing shares in the target companies would have until November 2021 to sell them.
Mr Maynard said if the ordinance stayed in effect after President-Elect Joe Biden’s new administration took office, it would create “a pretty big warp” as portfolios would be forced to deviate from benchmarks by November next to adhere to them.
Gavekal Dragonomics analysts Dan Wang and Thomas Gatley wrote in a note on Friday that the mandate could face legal challenges, poor implementation, or even a reversal by Mr Biden after his inauguration. However, they cautioned that “MSCI will likely remove companies from their indices if the order uncertainty persists”.
“In a broader sense, however, the move is a sign that Trump could use his remaining two months in office to attack more Chinese interests by executive order,” they added.
A portfolio manager at a global wealth management firm in Hong Kong said the impact on the stocks featured on the Pentagon list would ultimately be small, as stocks would likely find willing buyers without US investors.
He cautioned, however, that U.S. asset managers, investment banks, and exchange-traded fund providers would feel the real pain that could be forced to part with their existing holdings of these stocks.
“Active fund managers are the ones who will receive the greater penalty. . . They invested more in individual stocks, ”he said. “This will ultimately lead them to consider alternatives to these stocks.”
While Mr Biden would have the power to overturn Mr Trump’s order when he took office in January, analysts warned that the new administration could not do so without being gentle on China in an increasingly hawkish Washington.
“If I were Biden’s advisor, I would say, ‘Don’t touch this thing,'” said Alicia García Herrero, Natixis’ chief economist for Asia-Pacific.
“You have all the time in the world to sit with China and say, ‘Yeah, Trump was really mean – but that’s what I want from you now,'” she added.