Capital Markets Chaos at Hand as Trump Strikes at U.S.-Listed Chinese Firms

President Donald Trump has sought to bar U.S. investors from buying the securities of Chinese companies with ties to the military of Communist China.

Trump signed an executive order on Thursday evening that bans as of Jan. 11, 2021, securities transactions in 31 companies already identified as having links with the Chinese military.

It’s a short and simple order. A simple order with complex ramifications that will sweep through Wall Street.

I said in September 2019 that pressure was building over Communist China’s access to U.S. capital markets. It may have taken a year, but this is finally a concrete move to cut off access to Wall Street for state-linked Chinese companies.

The enormous Chinese telecoms China Mobile (CHL) and China Telecom (CHA) are included on the list of 31 affected companies. Both are listed on the New York Stock Exchange, which essentially will become pointless if U.S. investors are barred from trading in the shares.

At least US$500 billion in market capitalization in U.S. securities is covered by the order, White House trade adviser Peter Navarro said in a call with reporters.

“This is a sweeping order designed to choke off American capital to China’s militarization,” he said, according to Reuters.

“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,” Navarro added, according to The New York Times. “This strong action by President Trump puts a stop to that Wall Street insanity.”

U.S. investors – including individuals, companies, funds and permanent residents – won’t be able to buy the shares, derivatives or other security instruments of those 31 military-owned or military-linked Chinese companies as of Jan. 11. They will have one year, until Nov. 11, 2021, during which they are still allowed to sell those securities. If any company besides those 31 entities is at a later date adjudged to be linked to the Chinese military, investors would be barred from buying its securities 60 days after that decision and would likewise have one year in which to continue divestments.

With a market capitalization of US$132 billion, China Mobile is around the same size as United Parcel Service (UPS) . Both it and China Telecom would rank among the 10 largest telcos in the world. China Mobile shares fell 4.0% in New York trading on Thursday, then 5.0% in Hong Kong, where it is also listed. China Telecom dropped 5.3% in New York, then 7.8% in Hong Kong.

I envision legal challenges from U.S. investors on such huge holdings, which are key for index trackers. But should these bans go into effect, the Hong Kong listings would be the way forward for these companies. Other Chinese companies unaffected by Thursday’s order, such as Alibaba Group Holding (BABA) , (JD) and NetEase (NTES) , have recently opened an escape hatch to the delisting of their U.S. securities by listing in Hong Kong.

The Pentagon said on Aug. 28 that it was adding 11 companies to the list of entities it believes are owned or controlled by the Chinese military. The Department of Defense had already in June named and shamed 20 Chinese companies with similar military ties to the People’s Liberation Army.

All 31 companies by name

You can find the Aug. 28 order from the Department of Defense here, the initial list of 20 Chinese companies here and the second list of 11 Chinese companies here. Under Thursday’s order, the securities of all vehicles issued by or linked to those companies, including funds and index funds that include them, will become off limits.

Privately held Huawei Technologies and the world’s leading purveyor of video surveillance cameras and equipment, Hikvision SZ:002415, grabbed the headlines when they were included in the first batch of companies. Hikvision shares edged 1.5% lower on Friday trading in Shenzhen, where they are open only to mainland Chinese-approved investors.

So, too, were China Mobile and China Telecom as well as the aircraft maker Aviation Industry Corp. of China, or AVIC. They have vast corporate empires. For instance, in 2012 General Electric (GE) set up a 50-50 joint venture with AVIC by forming a company called Aviage Systems that was created to supply parts to the C919 passenger jet made in China.

The list also includes China Railway Construction Corp. CWYCY, which despite its name is one of the world’s largest general contractors and civil engineers, as well as CRRC CRCCY, the world’s largest maker of passenger trains. CRRC has built a US$95 million factory in Springfield, Mass., and signed contracts to supply carriages to metro systems in U.S. cities such as Boston, Chicago, Los Angeles and Philadelphia. Both CRCC and CRRC have ADR listings that it appears they would be wise to scrap.

Sinochem SH:600500, a big maker of fertilizer and plastics, is also on the second list. China’s first major multinational and largest trading company, it’s a state-owned conglomerate that has a vast range of petrochemical and agrochemical products.

Although their stocks are listed with a public float, Sinochem and other state-owned enterprises involved, such as China Communications Construction Co. HK:1800, are majority held by the state-owned Assets Supervision and Administration Commission, which handles China’s direct corporate stakes. So they are quite obviously state-controlled, as are the businesses in many sensitive industries in China such as telecommunications and aviation.

Hikvision, though, maintains that it is purely a private company and has never been owned by the Chinese state. The issue is that it sells equipment to the Chinese surveillance state, which operates nationwide but has a particularly heavy presence in places such as Xinjiang. In that western province, Uighur minorities are tracked with their every move. Hikvision undoubtedly works to develop appropriate cameras and sensors for the Chinese military and police if requested, probably with backdoors into its tech for the authorities to use, too.

Trump has declared these U.S. securities of China’s military complex a threat and a “national emergency,” under the same laws with which he targeted the ByteDance app TikTok and the WeChat app developed and run by Tencent Holdings (TCTZF) .

The TikTok order, on an app basically used for fun, seemed to be taking aim at the wrong target. Focusing on companies with military ties makes sense, but figuring out where the army, government and business converge in China is tricky.

Blurring of the lines

The People’s Republic of China is “exploiting” U.S. capital and capital markets to modernize its military, intelligence and security apparatuses, Trump said, which allows Communist China to threaten the United States and its forces “by developing and deploying weapons of mass destruction, advanced conventional weapons, and malicious cyber-enabled actions against the United States and its people.”

Trump said in the order that the blurring of the line between private and state-owned companies is part of China’s strategy of “Military-Civil Fusion.” Compelling civilian Chinese companies to serve the state is helping build China’s military-industrial complex, Trump said.

That sounds about right. The lines are very blurred between where the state ends and the private sector begins in China. Particularly with industries such as telecommunications and tech, the Chinese state is sure to be working with the private sector to advance the Communist Party’s agenda. The party normally has a Communist office within a private company, and in many cases has written itself into the charters of publicly listed companies as the superior authority to shareholders.

Trump has made it very clear with this order that he will continue to exert pressure on “enemy” nations such as China and Iran until the end of his tenure. That’s all the while he himself acts like a military dictator in refusing to relinquish power, a decision that reinforces the anti-democratic and anti-American sentiments often espoused by the world’s autocrats and dictators.

China hits back

China responded that the U.S. government should stop “viciously slandering” Chinese military-civilian integration, according to foreign ministry spokesman Wang Wenbin. Beijing also urged Washington to stop its “arbitrary” suppression of investments.

It is not clear what approach President-elect Joe Biden will take with China. Given the more antagonistic stance adopted by both Republicans and Democrats over China, it is likely Biden will seek to maintain pressure.

However, Biden, a seasoned politician, may attempt to rebuild diplomatic alliances over China with Western Europe and the “Quad” Asia-Pacific foreign policy alliance among the United States, Japan, India and Australia. Although Biden has made no comment over the higher trade tariffs imposed by Trump on Chinese imports, the new president may walk those back because they penalize U.S. companies using Chinese parts as well as U.S. consumers buying Chinese goods.

Since Thursday’s move by Trump is an executive order, Biden can simply reverse it if he chooses. Trump has bypassed Congress to a great extent during his presidency by ruling through presidential decree. Where Biden would struggle to turn around new pieces of legislation enacted under Trump, he can undo executive orders with the stroke of a pen. In this case, it is a very open question whether the new president would have the political will to walk back an order that may have widespread political support.

Get an email alert each time I write an article for Real Money. Click the “+Follow” next to my byline to this article.

Source Article