The Trump administration has toughened an executive order banning investment in 35 so-called Chinese Communist military companies by defining the scope of US investors and the prohibited assets, a move that could prompt index compilers to further refine their benchmarks.
The order applies to all transactions by “US persons” including individuals, institutional investors, pension funds, university endowments, banks, bond issuers, venture capital firms, private equity firms, index firms, and other US entities, including those operating overseas, Secretary of State Mike Pompeo said in a statement.
The Treasury Department separately clarified that the November 12 executive order blocks US investors from owning exchange-traded funds (ETFs) and index funds of the 35 companies and any of their 50 per cent-owned units and subsidiaries. The 35 have a combined market value of at least US$440 billion, according to an estimate by the Post.
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The clarification will ensure that US investors do not unknowingly support or contribute capital “to the development and modernisation of the People’s Republic of China’s military, intelligence, and security services”, according to Pompeo’s statement on Monday.
“If specific stocks need to be banned or if they don’t meet requirements [of the indices such as MSCI], they still need to be taken out,” Gordon Tsui, chairman of Hantec Pacific and president of Hong Kong Securities Association. While this will impact asset allocation, “it will not be long-term as funds can adjust to that by investing in other stocks that suit them,” he added.
Index compilers including MSCI, FTSE Russell and S&P Dow Jones Indices had responded earlier this month by axing the affected stocks such as chip maker Semiconductor Manufacturing International Corp and surveillance camera maker Hangzhou Hikvision – from their suite of stock and bond benchmarks.
More index fine-tuning could follow after the latest clarification before the ban takes effect from January 11, nine days before the inauguration of President-elect Joe Biden. US investors will be required to liquidate their existing holdings before November 11, 2021.
MSCI, for example, indicated on December 18 that it could update or modify its reaction upon further communications received by December 29 on the following day. FTSE Russell, a unit of London Stock Exchange Group, has said it would remove additional constituents if they were added to US sanctions lists by the Office of Foreign Assets Control, an arm of the US Treasury Department.
“Index compilers will be under pressure to readjust the components of their benchmarks,” said Ding Haifeng, a consultant with Shanghai-based financial advisory firm Integrity. ”It does not make sense if the exchange-traded funds are unable to buy shares of companies that are constituents of the indexes.”
The Trump administration added four companies including oil explorer China National Offshore Oil Corp to an initial list of 31 companies that included SMIC, Hikvision and phone carriers China Mobile and China Unicom.
The world’s biggest money managers including BlackRock, Vanguard Group and Morgan Stanley Investment Management are among investors who own securities issued by the Chinese companies.
Shares of the targeted companies barely reacted to the news on Tuesday, as analysts said that the pessimism has already been priced in since the start of the US-China trade war more than two years ago and heightened tensions in the financial markets.
US lawmakers passed a bill this month that could lead to the delisting of the Chinese companies traded on the New York Stock Exchange or Nasdaq within three years, if they fail to allow the US to review their audits.
The Commerce Department earlier this month also added about 60 Chinese companies including SMIC to a list that will require American firms to request a licence to do business with them.
Additional reporting by Daniel Ren in Shanghai
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