Despite the best efforts of Peter Navarro to counter what he called “fake news” and “irresponsible” journalism on the part of Bloomberg, market participants are still concerned about reports the Trump administration is mulling a series of options to restrict capital flows to China.
Those proposals include, but are apparently not limited to, delisting Chinese equities from US exchanges, compelling US firms to limit inclusion in indexes and capping investment via government pension funds.
Over the weekend, Treasury denied that any move to restrict US listings by Chinese firms was imminent, but did not speak to the veracity of the other proposals Bloomberg said are under consideration. Navarro, during a truly contentious interview with CNBC on Monday, tried to play down the news. On Tuesday, the network’s Kayla Tausche reported that the White House last week “circulated [a] policy memo that started [the] discussion process on potential US/Chinese investment limits”. It is not, as Peter claimed, “fake news”.
On Saturday, we took a quick stab at quantifying US ownership of Chinese equities and bonds using TIC data, and in the process, underscored the extent to which analysts and other market observers think any serious push to cut China off from US investment would be disastrous. Some called it “ludicrous”. Others dubbed it a “non-starter”.
In a new note out Tuesday evening (Wednesday in Hong Kong), Goldman assesses the flow implications of several potential options mentioned in the original Bloomberg story. The bank takes no view on the feasibility or likelihood of the administration actually going down this road.
First, Goldman uses TIC data and bottom-up ownership statistics from Bloomberg to calculate US investor exposure to Chinese equities. Total holdings amount to some $785 billion as of last month. Goldman breaks that down, as follows: US$75 billion in A shares, US$335 billion in Hong Kong, and US$375 billion the ADR market.
Those figures represent “1%, 14%, and 33% of the total listed market cap in the respective exchanges”, the bank writes, adding that “in aggregate, we estimate that US investors’ exposures to Chinese equities are equivalent to 7% of the outstanding Chinese listed market cap (~US$11tn)”.
As far as what it would look like if US investors were compelled by the Trump administration to liquidate all of that exposure, Goldman says that according to their calculations, “it would take 3, 180, and 195 days for them to fully divest based on the latest 3m ADT in the respective markets and assuming they account for one-third of ADT”.
Moving on to the impact of a potential forced de-listing, Goldman counts 224 Chinese companies listed on US exchanges. Obviously, the figures here are heavily skewed by BABA, but the bank notes that the companies have “an aggregate listed/free-float market cap of US$1137/826bn, accounting for 3.0/2.2% of the total in the US”. In a hypothetical forced-sale scenario, Goldman says it would take “195 days for [investors] to liquidate their stakes in the whole ADR universe”.
What about the prospect of Trump attempting to influence index inclusion? Well, that’s potentially more complex, as the administration apparently realizes (Bloomberg’s initial reporting suggested the White House hadn’t yet worked through the mechanics on this particular option).
After reminding everyone that Chinese stocks are now being included in a trio of major indexes (MSCI, FTSE, S&P) while bonds are being added to a pair of international benchmarks (Bloomberg Barclays and JPM), which have catalyzed some ~US$60 billion and ~US$40 billion of inclusion flows over the past year and a half, Goldman quantifies the impact from a hypothetical Trump decree.
“If US-listed ETFs were restricted from investing in Chinese stocks, we estimate that would impact US$530 billion of AUM and potentially lead to US$46 billion of selling pressure due to their passive exposures to Chinese stock”, the bank says, before noting that there’s doubtlessly some overlap, given that “a significant amount of this should be captured via the first two channels as large ETF investors are classified as institutional investors in Bloomberg ownership database”.
There’s much more in the full note, including an assessment of the impact on IPO flows, individual companies and investor types, but the brief discussion above gives you a rough idea of what the mechanical impact of the various proposals under discussion would be.
Of course, estimating the second-order impact from, for instance, the risk-off mood that would invariably accompany the roll out of any plan to restrict capital flows to China, is impossible.
Additionally, this has the potential to backfire on the Trump administration.
For one thing, US portfolios may be seen as more risky due to less diversification, Jan Dehn, head of research at Ashmore, wrote in a client note on Tuesday. He also cautions that piling still more money into US markets isn’t healthy at the current juncture given inflated prices and “extremely heavy” positioning.
Perhaps most importantly, Dehn warns that these kinds of capital controls would likely lead to an even stronger dollar against the yuan, undercutting US exports and ballooning the bilateral deficit. None of that is consistent with Trump’s agenda.
But we suppose all of this is merely one giant thought experiment, because according to the always reliable Navarro, reports that the administration is seriously considering any of these proposals amount to little more than “fake news”.