Chinese shares are out of sync with the rest of the world here on Wednesday, as they have been for the bulk of the year. Normally, they've surprised to the upside. Today, they're down when the rest of the world is testing record highs.
The CSI 300 of the largest companies listed in Shanghai and Shenzhen fell 1.3% by Wednesday's close. It has been a gloomy December so far for mainland markets, which until now have been the strongest performers in Asia. Not anymore.
The Chinese benchmark is up 20.7% in 2020. However, it has fallen 2.5% so far this month on selling that appears set to continue. It's a dent in impressive performance, for sure. Yet it may have further south to go as the Trump team has put in place punishments on China that it hopes the Biden administration will not be able to walk back.
As I highlighted they would on Monday, the United States has now imposed sanctions on 14 Chinese Communist Party leaders in response to Beijing's ruling that four elected legislators should be kicked out of Hong Kong's congress, the Legislative Council.
These are personae non gratae in the financial system. The 14 officials and their family members will not be able to travel to the United States. No vacations in Disney World, if they could even get there. The newly sanctioned figures supplement the list of 15 Hong Kong and mainland officials already under U.S. sanctions.
Of greater importance is that any of their assets in the United States can be frozen, as can assets flowing through the U.S. system. The real chilling effect is that financial institutions the world over that aid the flow of funds for these sanctioned officials can also be sanctioned by the United States or blocked from the U.S. financial system.
This means that even state-owned Chinese banks are leery of dealing with these Specially Designated Nationals on the sanctions list. It's a source of mirth here in Hong Kong that the city's leader, Chief Executive Carrie Lam, can't even get a Chinese bank to offer her counter service.
"I have piles of cash at home, the government is paying me cash for my salary because I don't have a bank account," Lam told local English TV channel HKIBC. She is one of the world's highest-paid heads of state, racking in HK$5.2 million (US$663,000) per year, all while killing the city. She says she is chief executive of the financial hub of Hong Kong "who has no banking services made available to her. I'm using cash for all the things."
Those newly Specially Designated folks are the 14 vice chairpersons of the National People's Congress Standing Committee, the legislature's top law-setting body. It is the committee that imposed the draconian treason-focused National Security Law on Hong Kong, which is used to oppress pro-democracy figures.
It also handed down the verdict that Hong Kong's head of state can simply kick out of the Legislative Council any politicians she doesn't like by claiming they are not patriotic enough. Lam doesn't need to prove that claim in a court. She can go with her gut feeling to expel any "enemy." The entire pro-democracy opposition resigned from the Legislative Council in protest.
There has been more action from the administration of departing President Donald Trump. The Pentagon on Dec. 3 named and shamed China's leading chipmaker, SMIC, as a company with close ties to the Chinese military. That means U.S. companies need to get special permission to trade with SMIC, as well as NYSE-listed Chinese oil giant CNOOC (CEO) , which the U.S. Department of Defense also put on the list. The privately held engineering companies China Construction Technology and China International Engineering Consulting Corp. were also added.
Those actions take to 35 the number of Chinese companies asserted to have ties to the People's Liberation Army. The enormous Chinese telecoms China Mobile (CHL) and China Telecom (CHA) were already on the list of military-linked companies.
While landing on the Pentagon's list doesn't have ramifications in itself, Trump signed an executive order in November that bars any U.S. person or entity from buying U.S. shares in those companies as of Jan. 11. U.S. investors have until Nov. 11, 2021 - a year after the date of the order - to sell out of those securities. The order covers at least US$500 billion in U.S. securities of Chinese companies.
SMIC is central to China's efforts to build a domestic semiconductor industry. Experts say it is a decade behind industry leaders such as Taiwan Semiconductor Manufacturing Co. (TSM) , the world's largest contract chipmaker. SMIC relies extensively on equipment from U.S. suppliers.
All these efforts act as handcuffs on incoming U.S. President Joe Biden after he takes office on Jan. 20. While Biden can walk back any executive order put in place by Trump, he may find that politically unpalatable when faced with a Congress that is showing bipartisan support for tougher measures on China.
Last but not least, a bill now sits on Trump's desk to require U.S.-listed Chinese companies to comply with U.S. accounting standards or face delisting. Trump will surely sign it into law after it passed unanimously both the House and Senate.
It is worth noting that South Korean shares, at a record high, have set a recent blistering pace and are now outperforming Chinese markets in 2020. The Kospi 200 index in Seoul is up 26.5% year to date. It has been a remarkable rebound for the export-driven Korean market, which has now recovered 86% since the lows set in March at the onset of the pandemic.
