What is going on at the New York Stock Exchange?
The NYSE said on New Year's Eve that it would delist China's three main mobile-phone companies: China Mobile (CHL) , China Telecom (CHA) , and China Unicom (CHU) .
Then, late on Monday night, the exchange said it wouldn't do that. It had a change of heart.
Now, as I write, we're getting word that they may move to delist them again. Investors will have whiplash, not to mention a headache making any sort of sense out of a portfolio that contains those stocks.
The Big Board is trying to comply with a November executive order from President Trump. The order said that, as of January 11, all trading had to cease in the three companies, as well as 32 other companies judged by the United States to be part of the Chinese military-industrial complex.
Trading will be allowed until November 11 this year - exactly one year after the order - if the trading is necessary for investors to sell out of the stocks.
These are three of the largest telecoms in the world, with a combined market value of US$156 billion. That's around the size of software maker Oracle (ORCL) or the drugmaker Eli Lilly (LLY) .
Trump's order said such companies with close ties to the Chinese military are a national security threat. By using ostensibly private companies to serve its military and raise capital on overseas exchanges, China "exploits United States investors to finance the development and modernization of its military," the order states.
My reading of the order, which is pretty clear, is that investors aren't allowed to buy the stocks of those 35 companies after January 11. That's unless, somehow, they can claim a purchase is necessary to divest the securities in the long run.
At no point does the order say exchanges have to delist the companies, simply that U.S. investors, funds and companies can't buy their shares. By extension, you could argue foreign investors aren't covered, so they could keep trading those stocks on the NYSE.
In any case, it wouldn't be until November 11 that the NYSE would have to stop purchases by U.S. investors. That indicates the shares need to trade until November 11, at least.
The NYSE has confused everybody by acting much like a Chinese stock exchange. It's making overnight rash decisions without public consultation, or any indication it's about to make these changes. Investors have a right to be angry. This isn't a tin-pot dictatorship where a leader or regulator makes rash sudden moves without warning. Well, the United States shouldn't be.
The latest wrinkle comes after U.S. Treasury Secretary Steve Mnuchin reportedly called NYSE President Stacey Cunningham to tell her that he disagreed with the Big Board's decision to reverse course about delisting the three companies. Phew.
The Treasury is the arbiter of the rules on the situation. The executive order says it's the Treasury Secretary who should explain the rules and regulations, and make sure they go into effect.
Mnuchin expressed to Cunningham his "displeasure" at the NYSE's about-turn, according to Bloomberg, which says "exasperation" over the stock exchange's shock turnaround reaches the "highest levels of the Trump administration."
Mnuchin is leading the administration's response. But Bloomberg says he is backed up on this by Chief of Staff Mark Meadows, National Security Advisor Robert O'Brien and National Economic Council Director Larry Kudlow. Heavy hitters and China hawks, all three.
Not surprisingly, the shares of the three companies have been all over the place. They rallied in U.S. trade on Tuesday morning after the initial delisting selloff. But in late trade on Tuesday, they lost around US$3.5 billion when it seemed the NYSE might make its third change of heart. All three are also listed in Hong Kong.
There's no doubt this would be a loss of face for China, a rebuke that it's not a market economy and not following capitalist rules. It's no surprise that a state-owned telecom would serve the military - I'm sure the vast majority of telecommunications companies the world over win military contracts - but China's state-owned companies are very much directed by the central government in the end. They'll do the Communist Party's bidding.
It doesn't make a lot of sense that companies owned or directed by a Communist government have full access to free capital markets. The same kind of access is not granted the other way, either, since China's stock markets in Shanghai and Shenzhen are roped off.
Would it affect the operations of the three companies? Not really. They rely on the enormous domestic Chinese market, and have built out the largest 5G network in the world. They're cutting-edge at home, whether or not they get investment from Mr. or Mrs. Smith.
Citic Securities analysts said in a research note that the three companies have on average only 1.5% of their shares listed in the United States, and have not raised capital there for 20 years. So having shares listed on U.S. exchanges "will only pose more risk for them," the brokerage said.
The NYSE is now seeking clarification from the government on what is and isn't allowed. If trading is indeed banned in those securities, they'll be delisted, Bloomberg's sources say.
The Treasury Department issued a statement late Monday saying the executive order does not require U.S. people and funds to divest their holdings in the 35 Communist Chinese military companies by January 11. But it did not say anything else, such as whether they have to have done that by November 11, which is how I read the order.
All this could change with the stroke of a pen once incoming President Biden takes office. Any executive order from Trump can be undone with another executive order from Biden. But it remains to be seen whether Biden will risk any political capital making concessions to China, when there's bipartisan support for taking a tough stance on the country.
Biden's team have declined to comment, for now. With exactly two weeks left in the outgoing president's scheduled term before he has to leave the White House, Trump has a matter of days to put in place his final restrictions on perceived enemies, however he construes that. Measures attacking China now will surely constrain Biden's hand.
