Investing in China Gets More Complicated as Tensions With the U.S. Rise



From its historic trading floor to the $126 billion worth of shares exchanged daily to the bell that marks the open and close of the trading day, theNew York Stock Exchange is a symbol of both the might and the reliability of U.S. financial markets.

Yet over the course of a week, the exchange made a series of embarrassing U-turns on whether it would continue to list three large Chinese companies. The incident underscored thetensions with China that President-elect Joe Biden is set to inherit. Along the way, the NYSE was rebuked by Treasury Secretary Steven Mnuchin, was criticized by officials in both countries, and sowed confusion among investors.

In November, PresidentTrump issued anexecutive order banning trades in companies tied to the Chinese military starting on Jan. 11 and requiring any remaining holdings in those companies to be divested by this November. Six weeks passed before investors, exchanges, and index providers received more details about which securities would be affected. On New Year’s Eve, the exchangeannounced it would delist the shares ofChina Mobile,China Telecom, andChina Unicom Hong Kong. All three companies are largely owned by the Chinese state.

Four days later, the NYSE scrapped the plan. The about-face prompted a disapproving phone call from Mnuchin to NYSE President Stacey Cunningham. The exchange reversed course again, saying it would delist the Chinese securities after all. Trading was halted in the U.S. on Jan. 11. The companies still have shares trading in Hong Kong.

“It’s odd for the NYSE to get this so wrong,” says Bloomberg Intelligence analyst Larry Tabb. “It’s bad enough to do a 180 on this within a week, but to go 360 degrees on such a major move so quickly means that they either got this terribly wrong, or there was significant outside pressure driving these decisions.” Representatives of the NYSE and Treasury declined to comment.

Market participants are still scratching their heads. Some people familiar with the situation say the NYSE, which is seen as politically savvy, got mixed messages from an administration whose policy was vaguely worded in the first place. Others speculated that the NYSE bowed to pressure from the business community to avoid antagonizing China when it first backtracked. Some of the biggest names on Wall Street have been courting business from China, the world’s second-largest economy, as it invites in more foreign financial firms. They don’t want to be locked out. Shares of the telecom companies have been held in emerging markets mutual funds and were parts of stock indexes.

The NYSE move ultimately to delist, along with belated guidance on restrictions from the Treasury’sOffice of Foreign Assets Control, set off a cascade of actions across the financial industry.S&P Dow Jones Indices,MSCI, andFTSE Russell have removed the securities from indexes. U.S. managers of mutual funds and exchange-traded funds such asBlackRock andVanguard have been selling their stakes.Goldman Sachs Group,Morgan Stanley, andJPMorgan Chase said they will stop offering about 500 so-called structured products traded in Hong Kong. Such products allow investors to make bets linked to the performance of indexes or stocks, and some were pegged to Hong Kong indexes that include companies banned by the U.S. The trio of telecom companies lost more than $30 billion in market value following Trump’s order.

Republican Senator Marco Rubio praised the NYSE’s ultimate decision after blasting its earlier reversal as “outrageous,” and serving the “interests of Wall Street and the Chinese Communist Party at the expense of the United States.” Chinese officials dismissed the impact of the restrictions and said it would ultimately hurt U.S. interests, but they also struck a critical note. “Some politicians in the U.S. have been oppressing foreign companies listed in the U.S.,” Foreign Ministry spokeswoman Hua Chunying said in a briefing in Beijing.

Federal authorities had been considering adding tech giantsAlibaba Group Holding Ltd. andTencent Holdings Ltd. to the blacklist, butno longer plan to do so, according to a person familiar with the discussions. It remains to be seen if the incoming Biden administration will enforce the trading bans. Adding to the uncertainty is the chaos surrounding the outgoing administration in the aftermath of theassault on the Capitol by Trump supporters.

The Securities and Exchange Commission has been pressing Chinese companies with stock trading in the U.S. to make sure investors are aware of the potential risks they face. SEC lawyers cited concerns about company disclosures and accounting, as well as Beijing’s refusal to allow outside inspectors to review audits of Chinese securities issuers.

Biden will seek to reset U.S.-China relations, but he’ll face pressure from lawmakers to take a tough stance. “The developments drive home an unfortunate fact for China—it is by far the weaker party in the financial relationship,” wrote Chang Shu, chief Asia economist for Bloomberg Economics, in an analysis. “For the U.S., it underlines the painful balance in trying to contain China’s rise while allowing the U.S. financial sector to capitalize on the massive growth opportunity China’s opening offers.” —With Saleha Mohsin, Ben Bain, Jennifer Jacobs, Robert Schmidt, Nick Wadhams, Shirley Zhao, and Lianting Tu
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