The world has become used to the guessing game of what damage Donald Trump and his cohort at the White House can still do before leaving their positions of power. One of the farewell gifts so far has been his executive order on banning US persons from investing in and holding shares of a list of 31 Chinese companies that allegedly have ties to the military. Not enough with that… the list could potentially be expanded to 130-140 entities over coming weeks.
MSCI and FTSE indices have indicated that they would exclude those from tracking them in their performances, of which I believe only FTSE has so far acted on. In any case, most of the selling of shares has and will come from their end and also from passive ETF managers. And we have already witnessed what damage is being done. The likes of CNOOC, China Mobile, China Railway Construction, China Communication Construction etc have lost between 20-30% of their market capitalisation in recent trading sessions.
To be fair, this plunge in share prices on massive volume probably constitutes a kitchen-sink reaction to Trump’s order. We will have to see over coming days and weeks what the ultimate impact will be, but clearly, officials at the White House and Pentagon must be high-fiving, particularly against the backdrop of many formal details and aspects of the government action still missing. What is, in fact, a US person, and will the Pentagon make a move on more enterprises beyond the 31 named?
I had the chance of asking a prominent US banker at a conference about US-China tech decoupling last week. He didn’t have a final answer on who a US person actually was. He was wondering himself, in fact. Are only US-based institutions and retail investors meant not to touch those shares? Are foreign subsidiaries of US institutional investors included? How would one look at US brokers making markets in those shares? Would there be a difference whether they are London or other subsidiaries from a jurisdiction point of view?
How about custodians? Will Northern Trust or State Street be included? It is one thing to ban Blackrock ETFs listed in New York to shun named Chinese companies. It is fundamentally another if US banks in Hong Kong can no longer run IPOs and secondary offerings, let alone make markets in secondary. And it would be sheer catastrophic if custodians were affected. We have no idea what kind of dislocation this could cause, and the only hope is that Washington remains half-way sensible.
What about the scenario that expands the list? Obvious and popular targets would be the likes of Alibaba. The company is neither owned by the government that could construe a link to the Chinese military nor are there formal business functions that cater to work being done in a military or national security context. Of course, no one can tell that Beijing isn’t using data and intelligence for its purposes, but equally, isn’t Boeing, for example, a private company that is very closely tied to the US military?
Let’s assume, for a moment, the worst-case scenario. If the declines in share prices of CNOOC et al present us with any cues, then Alibaba would run the risk of losing what, around 200 billion dollars in market cap…? That would push the valuation of the company down to or through 500 billion. Not that they are perfectly comparable, but how should this be seen in the context of Amazon’s of 1.6 trillion, or Apple’s of 2.1 trillion… you get the gist.
Would this scenario constitute the mother of all pricing arbitrages and open incredible entry points for anyone who luckily qualifies as a non-US person? Hmm… It may not happen in any case, but probably better to watch out for a potentially once-in-a-lifetime opportunity.
