Brokers and other financial groups from New York to Hong Kong have struggled to comply with the US presidential ban on investing in companies with suspected ties to the Chinese military.
Donald Trump’s executive order, which goes into effect on January 11, days before he leaves the White House, has baffled financial institutions, leaving the New York Stock Exchange banning a handful of Chinese companies, reinstating them days later , and Wednesday banning them again. under pressure of the Trump administration. Thursday, concerns about the application of the blacklist hit shares Alibaba and Tencent, Asian technology pillars listed in the United States.
Lawyers and financial executives say the ambiguously worded rules and guidelines on how they will be enforced have created confusion over how to avoid legal and financial penalties.
“The average financial institution is worried, ‘Am I going to be in trouble Tuesday? Said Paul Marquardt, partner at law firm Cleary Gottlieb. “NYSE is a symptom, it’s not the problem. The real problem is how far the new sanctions go. “
The hastily assembled five-page executive order signed by Mr. Trump last November prohibited the purchase of shares in 31 Chinese companies suspected of being linked to the People’s Liberation Army, including companies like China Mobile and Huawei. However, the order did not specify whether it also affected the subsidiaries and affiliates of those companies – a group that includes the US stocks of the three Chinese telecommunications companies NYSE announced its delisting.
Treasury had been slow to provide guidance on the order, but on December 28 it said subsidiaries would be included 60 days after a detailed list was released, which it has yet to do. In the absence of a list, the NYSE reversed its decision to cut several companies on Monday.
This drew recriminations from the anti-Chinese hawks of the Republican Party and prompted Treasury intervention. The Office of Foreign Assets Control (Ofac), which oversees the direction and enforcement of U.S. sanctions, has since said buying stocks with names similar to the 31 companies named in Mr. Trump’s executive order would be not allowed. But it has also created a problem for investors who now have to judge how close the names of the securities they own are to the list provided by the White House.
Scott Flicker, a partner at Paul Hastings, warned of an “additional category of securities that may have a similar name” to that on the executive order list. He said that left the investing public in “a low country”.
Index providers such as MSCI, FTSE Russell, S&P Dow Jones Indices and Nasdaq have announced their intention to remove Chinese companies from their benchmarks. However, everyone interpreted the Treasury guidelines differently. “It was a bit of a mess,” said an executive from one of the vendors.
The London Stock Exchange on Monday withdrew two securities, the US certificates of deposit of China Mobile and China Unicom, from its global equity segment. This happened after the NYSE delisted the companies, since ADRs were backed by New York-listed stocks.
NYSE’s backtracking cast the decision into doubt, sparking further discussions among LSE officials. But stocks are expected to stay off the LSE, following the NYSE’s second about-face and the expectation that the stocks will be on the as yet unpublished grant list.
Some brokers who process and settle trades have warned their clients that they will not be able to deal in securities linked to the 31 groups, an emerging markets investor told the Financial Times, requesting anonymity for fear of retaliation from the from regulators. Late Wednesday, Ofac said financial intermediaries could facilitate transactions if an investor seeks to sell an affected Chinese group.
“People find it difficult to understand exactly where the lines are [and] what they can and cannot do, ”said Maura Rezendes, partner at Allen & Overy who previously worked at Ofac. “Even with the cover of [further guidance] or the US government saying we didn’t want to ban these kinds of activities, you’ll just see people refuse to do it. This will lead to a deadlock in the market. ”
Fund managers said the mandate could prompt other Chinese companies to pull out of U.S. stock exchanges. Since 2000, Chinese companies have raised more than $ 140 billion through the sale of shares on the U.S. coast, according to data provider Refinitiv. It is unclear whether President-elect Joe Biden will reverse the policies Mr. Trump’s team adopted in his last days in office.
“This is a rivalry that is likely to be with us regardless of the change in the US administration,” said Morgan Harting, portfolio manager at AllianceBernstein. “Specific political or tactical choices will surely evolve. . . but I wouldn’t expect there to be a much warmer relationship all of a sudden.
The decree has already prompted mutual and exchange-traded funds to reduce stakes in Chinese groups and for investors to analyze which derivatives in their portfolio might prove problematic. U.S. shares of China Mobile and China Telecom have fallen nearly 20% since Mr Trump signed the order.
“You are essentially arming the financial markets,” warned Jack Janasiewicz, portfolio manager at Natixis Investment Managers.
Additional reports by Hudson Lockett, Michael Mackenzie