Trump’s rules on China investment spark confusion across global finance

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Brokers and other financial groups from New York to Hong Kong have been left scrambling to comply with a US presidential ban on investment in companies with alleged ties to the Chinese military.

Donald Trump’s executive order, which comes into effect on January 11, days before he leaves the White House, has flummoxed financial institutions, leaving the New York Stock Exchange banning a handful of Chinese companies, reinstating them days later, and on Wednesday banning them again under pressure from the Trump administration. On Thursday, concerns over how the blacklist will apply hit shares in US-listed Asian tech stalwarts Alibaba and Tencent.

Lawyers and financial executives say the ambiguously worded rules and guidance over how they will be enforced have sown confusion over how to avoid legal and financial penalties.

“The average financial institution is worried, ‘Am I going to be in trouble on Tuesday?’” said Paul Marquardt, a partner at law firm Cleary Gottlieb. “NYSE is a symptom, it is not the issue. The issue is really getting greater clarity on how far the new sanctions go.”

The hastily assembled five-page executive order signed by Mr Trump last November banned the purchase of shares in 31 Chinese companies believed to be tied to the People’s Liberation Army, including businesses like China Mobile and Huawei. However the order did not specify whether it also affected subsidiaries and affiliates of those companies — a group that includes the US shares of the three Chinese telecommunications companies NYSE has said it will delist.

Line chart of Performance since November 11, 2020 (%) showing Chinese telecoms have tumbled since Trump signed executive order

The Treasury had been slow to offer guidance on the order, but on December 28 it said subsidiaries would be included 60 days after it published a detailed list, which it has not yet done. In the absence of a list, NYSE reversed its decision to remove several companies on Monday.

That drew recriminations from anti-China hawks in the Republican party and prompted an intervention from the Treasury. The Office of Foreign Assets Control (Ofac), which oversees US sanctions guidance and enforcement, has since said that buying shares with similar names to the 31 businesses named in Mr Trump’s executive order would be banned. But that too has created a problem for investors who must now judge how close the names of securities they own are to the list provided by the White House.

Scott Flicker, a partner at Paul Hastings, warned of a likely “whole additional category of securities floating out there that might have a similar name” to one on the executive order list. He said that left the investing public in “a nether land”.

Index providers including MSCI, FTSE Russell, S&P Dow Jones Indices and Nasdaq have said they plan to drop Chinese companies from their benchmarks. However, each has interpreted the guidance from Treasury differently. “It was a bit of a mess,” an executive at one of the providers said.

The London Stock Exchange removed two securities, American depositary receipts of China Mobile and China Unicom, from its global equity segment on Monday. That happened after the NYSE had delisted the companies, since the ADRs were backed by shares listed in New York.

NYSE’s backtrack threw the decision into doubt, prompting fresh discussions among LSE officials. But the securities are expected to remain off the LSE, following the NYSE’s second about-turn and on the expectation that the securities will be on the as-yet unpublished subsidies list.

Some brokers who process and settle trades have warned clients that they would be unable to transact any securities linked to the 31 groups, one emerging markets investor told the Financial Times, requesting anonymity for fear of retribution from regulators. Late on Wednesday, Ofac said financial intermediaries could facilitate trades if an investor was seeking to sell out of an affected Chinese group.

“People have a hard time understanding exactly where the lines are [and] what they can and cannot do,” said Maura Rezendes, a partner at Allen & Overy who previously worked at Ofac. “Even with the cover of [further guidance] or the US government saying we didn’t mean to prohibit those kinds of activities, you’ll just see people refuse to do it. That will cause gridlock in the market.”

Money managers said the mandate could prompt other Chinese companies to de-list from American exchanges. Since 2000, Chinese companies have raised more than $140bn through share sales on US shores, according to data provider Refinitiv. It is unclear whether president-elect Joe Biden will reverse the policies Mr Trump’s team has enacted in its final days in office.

Column chart of Proceeds from equity offerings by Chinese groups in the US, by year ($bn) showing Chinese companies have raised north of $140bn in the US since 2000

“This is a rivalry that is likely to be with us regardless of the change in the US administration,” said Morgan Harting, a portfolio manager at AllianceBernstein. “The specific policy choices or tactics will surely evolve . . . but I wouldn’t expect there to suddenly be much warmer relations.”

The executive order has already prompted mutual and exchange traded funds to cut stakes in Chinese groups and for investors to analyse what derivatives in their portfolio might prove problematic. US shares of China Mobile and China Telecom have fallen nearly 20 per cent since Mr Trump signed the order.

“You are essentially weaponising the financial markets,” Jack Janasiewicz, a portfolio manager at Natixis Investment Managers, warned.

Additional reporting by Hudson Lockett, Michael Mackenzie

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