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President Trump has signed an executive order that prohibits US nationals or entities from investing in firms that supply, support, or are owned by the Chinese People’s Liberation Army.
The executive order names 31 companies, some of which are publicly traded, that "enable the development and modernization" of the PLA and affiliated intelligence agencies or security services. The order lists many state-run aerospace, shipbuilding and construction firms but also a number of telecommunications as well as technology companies such as Huawei, China Mobile and Hikvision.
According to the order, US persons or entities are prohibited from opening new investment positions in these companies after January 11 and must divest their holdings by November 2021.
REPORT RELEASE: The new EO prohibits Americans from investing in Chinese military companies, including 31 companies named by the Pentagon. RWR has identified an additional 128 publicly traded companies that will be implicated by the investment ban.https://t.co/55EDHrwJzk
— Claire Chu (@ClaireJChu) November 12, 2020
Two of the companies on the list, China Mobile Communications and China Telecommunications have American depositary receipts (ADRs) on exchanges in New York. Many of the other companies that are publicly traded in Hong Kong have American institutional holdings via funds.
According to the Wall Street Journal, Chinese firms now make up some 40% of major emerging-markets indexes.
US Funds are Dumping Chinese Firms (NYSE: CHL, NYSE: CHA)
According to Whale Wisdom, a platform that tracks 13F filings, an SEC quarterly report that lists the publicly traded holdings of funds worth over $100 million, both China Mobile NYSE:CHL and China Telecom NYSE:CHA are being dumped by fund managers.
Per Whale Wisdom, the number of funds holding China Mobile as per Q2 2020 has decreased to 284 from 313 the quarter prior, while the number of new positions declined by 25%. Amongst firms that dumped China Telecom stocks, Lazard Asset Management led the pack clearing out 10.7 million shares worth approximately $360 million while BlackRock was next clearing out approximately 1.2 million shares with $40 million.
China Mobile, which isn’t as widely held by American funds, saw a similar fate: 5 of the 80 funds that hold the stock closed their positions entirely while the number of shares being held by fund managers declined by 16%.
Many of the other firms listed in the order, while not included in some 13F filings, are widely available for US investment via the Hong Kong exchange (so-called H shares), or indirectly through A-shares listed on exchanges in Shanghai and Shenzhen (which are generally only available to Chinese investors).
Further Dampening Enthusiasm for Investment in China
As the Trump administration enters its apparent final days, this could be seen as its last moves to reposition the flow of capital away from China — a coda to the trade war that punished China and countries that bet big on its growth while rewarding markets like Taiwan.
“American capital should not be used to finance the construction of Chinese communist weapons literally aimed at killing Americans and driving the U.S. military out of Asia,” Peter Navarro, director of the White House Office of Trade and Manufacturing Policy is quoted as saying in the Wall Street Journal. “This strong action by President Trump puts a stop to that Wall Street insanity.”
Florida Senator Marco Rubio also supported the move, and the New York Times quotes him as saying, “the Chinese Communist Party’s exploitation of U.S. capital markets is a clear and ongoing risk to U.S. economic and national security.” He added, “Today’s action also lays down a clear marker for U.S. policy going forward — we can never put the interests of the Chinese Communist Party and Wall Street above American workers and mom-and-pop investors.”