“[I’m] very disappointed” in China, Donald Trump said, in a Fox Business interview with former CNBC “money honey”-turned sycophant Maria Bartiromo.
“Cheap labor turned out to be really expensive”, the president added, parroting a talking point he most assuredly did not write.
The president’s remarks to Fox underscored rising tensions between the world’s two largest economies, thereby exacerbating fears that the deterioration in sentiment seen over the past several sessions in US markets could snowball.
Trump also told Fox he’s “looking very strongly” at Chinese companies listed on the NYSE and the Nasdaq.
Earlier this week, Trump effectively banned the Federal Retirement Thrift Board from implementing a planned shakeup that would have entailed investing some government employee savings in Chinese equities.
It was the first nod towards implementing restrictions on the flow of capital to China.
“You know [the savings plan] is run by Obama appointments, right?”, Trump
told asked Bartiromo. “We’re going to find out whether or not they’re going to do it very soon, and if they’re not, we’re going to replace them very quickly”.
As noted, the move to overturn TSP’s plans by executive decree was actually seen as the least controversial option last year when the administration was considering a variety of measures to cut off the flow of capital to China. Trump also reportedly considered forcibly delisting Chinese companies from US stock exchanges and commandeering the stock index construction process at benchmark providers. Those plans were widely decried as potentially dangerous and panned as a “disastrous non-starter” by some market participants.
Fast forward eight months and Trump is on Fox nodding to the possibility of scrutinizing and otherwise cracking down on US listings.
As a reminder, Goldman sketched out the implications of capital flow restrictions on China in a note last autumn, when this issue was last in the news. Here’s what the bank had to say on the delisting idea:
We note that 224 Chinese companies (only primary listings, in form of ADR) are currently listed on the US bourses with an aggregate listed/free-float market cap of US$1137/826 billion, accounting for 3.0/2.2% of the total in the US. The distribution is, however, heavily skewed towards a few large-cap stocks, with BABA, JD, and NTES representing 38%, 3.0%, and 3.0% of the outstanding listed market cap in the China ADR universe. Our bottom-up estimates show that US investors may have US$138 billion, 12 billion, and 9 billion of direct exposures to BABA, JD, and NTES. Overall, we calculate it would take 195 days for them to liquidate their stakes in the whole ADR universe, assuming they represent 1/3 of 3m ADT.
The IPO flow impact of any such move could be large, albeit manageable.
“The US market has been one of the three most common destinations for capital raising for Chinese companies, with the data showing 100 Chinese companies have raised a total of US$47 billion in the US in the past five years, compared to 1242 companies/US$124 billion onshore China, and 320 companies/US$120 billion in HK during the same period”, Goldman went on to say, in the same October note, on the way to adding the following useful color:
While the companies are listed in the US, their shareholding structure appears quite diversified, with US investors representing around 32% of the outstanding shares by market value for these 100 companies. It is also noteworthy that the ownership representation from US investors in US-listed IPOs has fallen over time, likely offset by the rising participation from Chinese investors. While the US remains a popular listing destination for Chinese stocks (16% of aggregate global funds raised in the past 5 years), the listing rule changes in HK since 2018 (i.e., WVR is allowed to list and Biotech chapter) and the recently launched STAR board in Shanghai could potentially alleviate the disruptions in case of further tightening of listing standards for Chinese companies in the US, in our view.
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 quantified the impact from a hypothetical Trump decree banning US ETFs from investing in Chinese assets via their inclusion in global benchmarks.
“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 said, before noting there’s doubtlessly some overlap with data on individual and institutional ownership.
If you’re wondering how long it would take for US investors to dump all of their holdings in Chinese stocks, Goldman said last year that the divestiture process would drag on for three, 180, and 195 days, for China A, HK, and ADRs.
It’s certainly true that there are accounting issues the US should consider (and Trump brings that up in his interview with Bartiromo), but investors have a demonstrably difficult time separating normative concerns from factors that will affect their P/L.
Irrespective of whether it’s the “right” thing to do, delisting Chinese companies from US exchanges or otherwise going further down the road towards capital restrictions may cause risk assets to selloff globally.
And while it’s understandable that politicians may want to shield government retirees from the vagaries of Chinese equities, it should be left to individual investors to do their own due diligence when it comes to individual stocks. Accounting fraud is hardly the sole purview of Chinese corporates, after all.
This is all just food for thought as “Cold War 2.0” rhetoric heats back up.
In the same series of remarks to Fox, Trump suggested he may try to “stop” China from getting a vaccine first, and reiterated that he will not renegotiate the trade deal.
He also claimed the US “has a lot of information” on China and the origins of COVID-19. That information, the president said, is “not good”.