Constricting investments into Chinese companies could hit the US as hard as it hits China


BEIJING — Possible U.S. restrictions on investing in Chinese companies would not only have a limited effect on China — but it could also hurt the United States, analysts told CNBC.

The comments come on the back of reports that the White House is considering investment curbs on China, such as delisting Chinese stocks in the United States and limiting government pension funds’ investments in the Chinese market.

Restrictions such as delisting of Chinese stocks in New York could send the message that the “U.S. is not as open as before. It’s going to have a fairly far-reaching impact,” Ning Zhu, professor of finance at Tsinghua University in Beijing, told CNBC in a phone interview on Sunday.

U.S. stocks closed lower on Friday after Bloomberg first reported the news. The KraneShares CSI China Internet ETF (KWEB), which tracks major Chinese internet-related companies listed in New York or Hong Kong, fell 3.8%.

Analysts say the reported restrictions could be an effort by the White House to gain leverage in the upcoming U.S.-China trade talks.

It is unclear how close, if at all, the White House is to announcing curbs on U.S. investment.

The U.S. Treasury assistant secretary for public affairs, Monica Crowley, said in a statement over the weekend that “the administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time. We welcome investment in the United States.”

The China Securities Regulatory Commission did not respond to a faxed request for comment.

Options outside the US

If the U.S. were to carry out such investment curbs, it would be difficult to implement and will negatively affect U.S. capital markets, said Zhu. “Finance is unlike military or export orders, or trade. Finance is much more difficult to trace.”

Many Chinese start-ups have chosen to list in the U.S. for a boost to their brand and access to U.S. dollars.

U.S. banks, U.S. mutual fund companies will be at a clear disadvantage to their global competitors.

Ning Zhu

professor of finance at Tsinghua University

More than 200 Chinese companies, including giants like Alibaba, have raised tens of billions of dollars on U.S. capital markets through listings or American Depositary Receipts, according to an August report by analysts from research firm Gavekal Dragonomics, Andrew Batson and Lance Noble.

However, not all major Chinese companies have chosen to list in New York.

Tencent, the parent of the WeChat messaging app and a major developer of mobile games, is listed in Hong Kong. Smartphone maker Xiaomi and food delivery company Meituan-Dianping also went public in Hong Kong last year. London is another alternative, Zhu pointed out.

The Chinese government would also like to keep its largest companies at home, and launched a new stock board in July in an effort to create a better environment for technology companies to go public.

Missed opportunities

On the other hand, foreign investment in mainland-listed Chinese stocks remains limited, even as Beijing tries to open its markets further to overseas investors. Since the domestic stock market is dominated by retail investors, authorities are trying to attract more stable inflows from institutional investors.

Global stock index provider MSCI has also been gradually adding some mainland Chinese A-shares to its key emerging markets index, and more than $1.9 trillion in assets were included in the benchmark index as of the end of 2017.

In April, the Bloomberg Barclays Global Aggregate Index started adding Chinese bonds. J.P. Morgan also announced it would include Chinese debt in its benchmark bond index early next year.

Full inclusion of Chinese assets in these stock and bond indexes would mean that many Americans would be indirect investors in Chinese capital markets through mutual funds and other widely held investment products.

If such U.S. investments were banned, American investors would miss out on what many analysts expect will be a long-term growth story.

“While there may be other political reasons for restricting US capital flows to China, Washington should understand that the implications for the trade imbalance are the opposite of what they want,” Michael Pettis, finance professor at the Guanghua School of Management at Peking University, said in an email.

“If American capital that would have gone to China stays home, that means inevitably that the net American imports of capital will rise, and with that so will the American current account deficit — not with China, but overall,” Pettis explained.

In addition to encouraging greater foreign participation in its capital markets, China is trying to increase foreign access to its financial services industry. Some announcements in the last 18 months include allowing a foreign bank to take majority ownership of its local securities joint venture.

If this trend continues, regardless of how slowly, being prohibited from China would mean “U.S. banks, U.S. mutual fund companies will be at a clear disadvantage to their global competitors,” Zhu said.

Fraud, transparency concerns

One of the reasons the White House may be considering the investment restriction is reportedly to protect U.S. investors from excessive risk due to lack of regulatory supervision of Chinese companies.

“There’s a kernel of legitimacy in this,” said James Early, CEO of investment research firm Stansberry China. He pointed out that many Chinese companies that were able to access U.S. public markets around 2010 received no consequences for fraudulent behavior.

Mainland China’s capital markets are among the largest in the world, but often fall short of the governance and liquidity levels of more developed markets.

Last week, FTSE Russell decided not to add China to its widely tracked government bond index due to issues such as lack of trading activity and long settlement periods, according to Reuters.

Analysis by New York-based research provider Rhodium, released in the fall of 2018, also found that 65% of Chinese companies included in the MSCI emerging markets index at that time were ultimately controlled by the state.

At that time, MSCI said in a statement to CNBC it did not comment on third party reports.

“The presence of SOEs (state-owned enterprises) is not an unique phenomenon in China but common to many emerging markets … All companies, including SOEs, are treated equally as long as they meet the index eligibility criteria,” the statement said.

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