HONG KONG/NEW YORK/TAIPEI/TOKYO -- It would be the most extreme escalation yet of the rivalry between Washington and Beijing: a restriction of Chinese companies' access to U.S. finance, including their forced delisting from U.S. stock exchanges.
Shares in U.S.-listed Chinese tech companies, such as Alibaba and JD.com, are yet to make up the sharp losses they suffered on Friday after Bloomberg reported that the Trump administration was discussing the idea. Japan's SoftBank, which counts Alibaba as one of its most successful investments, has also sold off.
Investors and companies are now increasingly factoring in political risk, even though the U.S. Treasury has subsequently clarified that it has no active plans to pursue a mass delisting of Chinese companies or force wholesale financial decoupling.
"[The U.S.] wanted to test what the market thinks of this type of idea," Nathan Thooft, head of global asset allocation at Manulife Investment Management in New York, said. "There's clearly been some work done on the concept. The question is how far along they are."
Here are five things you need to know about what it all might mean.
What is at stake?
A lot -- far more than the tariffs on $360 billion of Chinese exports that the U.S. has imposed since last year. The market capitalization of the 156 Chinese companies currently listed in the U.S. totaled $1.2 trillion as of February, according to the U.S.-China Economic and Security Review Commission.
In addition, the White House is reportedly considering limits on the amounts that U.S. government pension funds can invest in Chinese companies. It may also seek a cap on the value of Chinese companies included in benchmark investment indexes, such as the MSCI, that guide the U.S.'s multitrillion-dollar institutional investors.
U.S.-listed Chinese stocks have not made back most of the losses they suffered last week. Indeed, for some actors, not least Beijing, financial decoupling is already a fact of life.
"Investors in Chinese equities, and especially in the equity of companies listed in the U.S., will increasingly have to think about political risk," Louis Gave, co-founder of Gavekal, a research boutique, wrote on Monday in a note to clients. "This much has been obvious since the U.S. administration brought Chinese telecommunications equipment-maker ZTE to its knees with its June 2018 imposition of export restrictions."
How might delisting happen?
Gradually. Individual stock delistings happen all the time, but a forced mass delisting would be unprecedented. For example, several Russian companies, especially in energy, still trade in the U.S. despite facing U.S. sanctions following the 2014 dispute over Ukraine.
Instead, the most likely avenue would be via legislation already proposed by Republican Senator Marco Rubio that would require Chinese companies to meet U.S. auditing and accounting standards if they want to remain U.S.-listed.
That would be "the rational outcome ... instead of a full ban," said one equity capital markets banker at a global investment bank in Hong Kong.
Chinese companies would then face a choice. They could comply with the tighter regulations and remain listed in the U.S. -- or list on another market such as London, Hong Kong or mainland China. They could then exchange their U.S. scrip for the newly issued alternative paper.
In some cases, though, Beijing will have the final say -- especially for companies in strategic sectors.
"The U.S. regulatory system demands access to auditor documents ... and China prohibits access to the documents," said Brock Silvers, managing director at Kaiyuan Capital, a Shanghai-based private equity firm. "China may elect to have companies delist rather than allow them to violate Chinese regulation by submitting to U.S. demands."
For some, that process may have already started. In May, China's top contract maker of semiconductor chips, Semiconductor Manufacturing International Corp., voluntarily delisted its New York Stock Exchange-listed shares.
The delisting happened soon after Washington blacklisted one of SMIC's main clients, Huawei Technologies, the tech company that lies at the heart of U.S. concerns about covert Chinese surveillance. SMIC has denied any such connection and instead cited low trading volumes as the reason for its move.
What might financial decoupling mean for Chinese companies?
That depends. New York remains the stock market of choice, and the U.S. remains the world's deepest pool of capital, which China needs to tap into if it is to continue to grow. Certainly, a sudden decoupling would disrupt global markets and hurt both Chinese and U.S. consumers and jobs. In debt markets alone, China holds over $1.1 trillion of U.S. government bonds.
Yet for the biggest Chinese companies, losing access to U.S. stock markets may not mean much over the longer term.
Many U.S.-listed Chinese tech companies, such as Alibaba, are "capital light" internet platforms that rely on internal cash generation rather than equity markets to fund their capital expenditure. Meanwhile Huawei, the locus of U.S. concerns about Chinese technology and surveillance, is not listed.
Meanwhile, some smaller listed companies may not miss the costs of maintaining a U.S. stock market presence, especially if their share trading volumes are low. "They'll eventually ask themselves: what is the point?" said John Brebeck, senior adviser at Quantum International Corp., a capital markets advisory. "Thus the delisting process will begin."
China has also worked hard to develop alternative stock exchanges at home, especially Shanghai's tech-heavy STAR market. STAR has already attracted dozens of startups ranging from semiconductor manufacturers to new materials companies since it opened in July.
On the plus side, companies that float there often enjoy stratospheric valuations as Chinese capital controls mean many retail investors have nowhere else to put their money.
When Qihoo 360 Technology, a software services company, delisted from New York in 2016, and then listed in Shanghai, it was valued at $62 billion -- seven times more.
On the negative side, listing in mainland China results in paper that is hard to use as an acquisition currency for foreign M&As. Chinese capital restrictions also make cash deals harder.
Hong Kong is another alternative. Alibaba has long had plans to list there. Indeed, the success this week of Budweiser's Asian stock offering could reawaken Alibaba's interest.
"I'm sure Alibaba has an emergency plan that involves the Hong Kong Stock Exchange," said Harry Yuen, analyst at Tonghai Securities in Hong Kong.
A wave of listings in Hong Kong would also boost its fortunes. Amid the running street protests, it could also enhance the city's strategic importance as an international financial center that is viewed as independent of Beijing. Since 1993, Chinese companies have raised around $60 billion in Hong Kong.
And what might it mean for the U.S.?
Judging by comments from Mitch McConnel, the Republican Senate majority leader, little good. It "could end up hurting us," he told CNBC this week. "Whatever tactics we use with regard to China need not be ones that hurt us."
Investment bankers who have reaped millions of dollars in listing fees will likely lobby fiercely against the move. So too U.S. stock markets themselves. Nasdaq this week called it a "statutory obligation of all U.S. equity exchanges" to provide nondiscriminatory capital markets access to companies and so create a "vibrant market that creates diverse investment opportunities." The New York Stock Exchange did not respond to a request for comment.
For investors, "it would be an investment hit," the Hong Kong banker said. "They would lose exposure to some of the fastest-growing companies and the [world's] second-biggest economy."
As for U.S. markets, a Chinese ban could simply see the market move elsewhere, much as happened in the 1960s when U.S. regulations helped foster the Eurobond market overseas, principally in London. "That would in the long term weaken the U.S.'s position as a global financial and capital market," said Liu Ningrong, professor and principal at the Institute for China Business at the University of Hong Kong.
So is it all just a storm in a teacup?
No. Nobody believes anything will happen fast. As Ray Dalio, founder of the world's largest hedge fund Bridgewater, mused in a LinkedIn blogpost on Tuesday, the Trump administration may be "inching towards bigger moves."
Everyone also agrees that financial decoupling would hurt both Chinese and American consumers, workers and jobs. On Monday, as if to emphasize business as usual, New York's Empire State Building lit up in red and yellow to celebrate the 70th anniversary of the People's Republic of China.
36Kr Holdings, a Chinese website that tracks startup fundraising in the country, also filed to raise $100 million in a U.S. initial public offering, while e-learning company Youdao also filed for a U.S. IPO.
Washington, and not just Donald Trump's administration, may have other ideas.
Senator Rubio's bill, which would create stiffer listing and accounting requirements, enjoys bipartisan support. And if a Democrat wins the 2020 election, some believe Sino-U.S. relations could worsen. Senator Elizabeth Warren, a leading Democrat contender, has proposed a trade policy so radical that, as she has described it: "America itself does not meet many of [its] ... standards today."
Eduardo Baptista and John Paul Rathbone contributed to this report.