Mainland stock markets in China are closed all week in honor of the 70th birthday of the People's Republic of China on Oct. 1. Yes, a country with 3,000-plus years of history has turned 70. The Communist part, anyway...
So mainland Chinese investors have not had a chance to respond to assurances out of the White House. The U.S. administration has walked back from reports that it may move to curb Chinese companies' access to the U.S. capital markets.
Despite the denials, I have a sneaking suspicion these reports are on the mark, that there is discussion to that effect. So it is worth considering what form of curbs the U.S. government could impose on Chinese companies that are intent on accessing American money.
The reports state that President Donald Trump's administration is considering delisting Chinese companies from U.S. exchanges. The Trump administration reportedly is also looking at limiting the ability of U.S. government pension funds to invest in Chinese companies. Its third line of attack would be to examine capping the inclusion of Chinese companies in stock indexes compiled by U.S. companies. MSCI would be of prime consideration there.
Trump himself has "given the green light to the discussion," according to Bloomberg, which first reported the news. It's not clear how any of those three approaches would play out. The simplest (and most legal) target, if the U.S. government chooses to proceed, is to restrict how its own pension funds invest.
Navarro cries 'fake news'
White House trade adviser Peter Navarro on Monday dismissed the reports as "fake news." Navarro said on CNBC that he had scoured the Bloomberg report far more carefully than it was written. "Over half of it was highly inaccurate or simply flat-out false," Navarro said.
Does that mean a little less than half was on the money? I've become accustomed to "fake news" turning out to be far more real than its detractors admit. A U.S. Treasury spokeswoman said the administration is not contemplating blocking Chinese companies from listing on U.S. stock exchanges "at this time."
On Friday, e-commerce giants Alibaba Group Holding (BABA) saw its shares dip 5.2%, with rival JD.com (JD) down 6.0%. Search-engine operator Baidu (BIDU) fell 3.7%. All three rallied briefly on Monday but have yet to recover much of the lost ground.
It's unlikely these private companies would or should be the main targets of U.S. ire, although they may be caught in the crossfire. The U.S. president shouldn't worry about whether Ms. Chan in Shanghai is getting her shipments of Olay hand cream and Chanel bags on Taobao.
It's more likely that major state-owned enterprises (SOEs) or companies operating in sensitive industries such as telecommunications would be targeted. It is true that private businesses such as Alibaba operate according to the rules laid out to them by Beijing. But state-owned enterprises operate at Beijing's behest. In many cases, the company charter stipulates the Communist Party is the ultimate authority, above and beyond shareholders.
So these SOEs are directly enriching the Communist Party and following central government directives. China hawks such as U.S. Sen. Marco Rubio (R-Florida), former economic adviser Steve Bannon and the hedge-fund manager Kyle Bass have been pushing for the United States to disentangle itself from the Chinese state apparatus.
There's precedent for U.S. foreign policy to hit home in capital markets. The Russian company Rusal HK:0486, one of the world's largest manufacturers of aluminum, is listed here in Hong Kong. Its shares fell by half on April 9, 2018, when the Trump administration extended sanctions to it and 11 other companies controlled by seven Russian oligarchs.
The Russians, as well as 17 senior members of the Russian government, and those companies were targeted for profiting from a nation engaged in "malign activities" around the world. Rusal shares then got a 9% bounce this January, when the company and other parts of the empire of tycoon Oleg Deripaska were taken off the sanctions list.
I'm not sure we would see blanket sanctions on Chinese companies. That would be too disruptive. There are 156 companies with their primary listing on U.S. exchanges, with a collective market capitalization of US$1.2 trillion.
But it would not be a stretch to see the United States take action to restrict pension fund and index investment into Sinopec (SNP) , for instance. With a full name of China Petroleum & Chemical Corp., Sinopec has listings in New York, Hong Kong and Shanghai, giving it a market capitalization of US$82.3 billion.
Anhui Conch Cement (AHCHY) is at the center of a perfect storm. It is a state-owned enterprise; it benefits from and builds Beijing's infrastructure projects at home and abroad; it has a joint listing in the United States as well as Shanghai; and it is included in MSCI's China A shares indices.
Watch out also for air carrier China Southern Airlines (ZNH) , diesel engine maker Weichai Power (WEICY) and China Construction Bank (CICHY) . All three are state-owned enterprises with secondary U.S. listings that are included in the MSCI A share indices.
ZTE Corp. (ZTCOY) still has a U.S. listing, even though U.S. government entities are prohibited from buying equipment from the telecommunications maker. Mobile phone network operator China Mobile (CHL) has an New York Stock Exchange (NYSE) listing that could come under threat should the U.S. government target telecoms as a sensitive industry.
State-owned enterprises such as the railway equipment maker CRRC Corp. (CRRRF) could be targeted because they benefit from China's global expansion plans, particularly the One Belt One Road initiative. The train carriage maker has already had an incredibly frustrating time after building a US$100 million factory in Chicago, which now basically has no work due to fears from federal and city government officials it will supply "spy trains."
CHALCO, with a full name of the Aluminum Corp. of China (ACH) , is the eastern equivalent of Rusal. The state-owned enterprise is listed on the NYSE and in Hong Kong and Shanghai. It could also find itself a U.S. government target.
A more generic concern is that Chinese companies, even those listed in the United States, do not always operate according to international accounting standards. A bipartisan group of U.S. lawmakers introduced a bill in June that stands a good chance of passing; it would force Chinese companies to allow oversight of their auditors, or provide full audits, with the penalty of delisting.
Hong Kong would be the likely beneficiary if Chinese companies decamp from U.S. markets, voluntarily or by force. Alibaba has been considering a secondary listing in Hong Kong, already home to the primary listing of giants such as mobile gaming and WeChat operator Tencent Holdings (TCEHY) .
China clamps down
Here in Hong Kong, we are licking our wounds from Tuesday after the Hong Kong police shot a demonstrator, an 18-year-old high school kid, with a live round of ammunition for the very first time. The benchmark Hang Seng brushed that off; it closed down 0.2% on Wednesday afternoon, one of smallest movements on a down day in Asia.
I marched, in a peaceful but unauthorized demonstration through the heart of Hong Kong island. There was street fighting later on at various points around the city. In case you're confused about what has been going on here in Hong Kong, there's a great timeline here from The New York Times, which highlights all the major events.
Basically, a free market is attempting to live and work as an "autonomous" part of an authoritarian country. Under President Xi Jinping, China has moved backward and become more dictatorial. The "emperor for life" has clamped down on freedoms and capital flows, built military outposts in the South China Sea, and says "no force can ever shake the status of China, or stop the Chinese people and nation from marching forward," as he said on Tuesday, dressed in a Mao suit in front of the Gate of Heavenly Peace.
This conflict between open governance and autocracy appears set to now play out in U.S. capital markets, sometime soon.