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US pension fund freeze on investment chills China stock outlook

Fears of financial schism between the two nations rise as Trump ratchets up pressure

The move by the U.S. government retirement fund is one more sign that the U.S. and Chinese capital markets are decoupling.   © Reuters

SHANGHAI -- With a U.S. government retirement fund putting a hold on plans to invest in Chinese equities under pressure from the White House and Congress, market watchers worry that foreign money that has sustained mainland shares through the pandemic could dry up.

The U.S. Federal Retirement Thrift Investment Board, which manages nearly $600 billion in retirement assets for government workers, on Wednesday halted this year's plans to invest in Chinese stocks. Although the amounts involved were not large, the move could deal a psychological blow to other investors as well, the Shanghai arm of a foreign brokerage wrote in a memo.

The decision "is a victory for China hawks in the U.S., and a signal of the risks to capital markets integration of rising tensions between Beijing and Washington," wrote Michael Hirson, practice head for China and Northeast Asia at New York-based consulting firm Eurasia Group, in a note.

On Thursday, the Shanghai Composite Index dropped 0.96% on the day to close at 2,870.34.

China's share prices had been relatively more resilient than other stock markets in the wake of the coronavirus, with foreign investment considered a key factor in mitigating the decline. Chinese stocks have been inching back since a plunge around the Lunar New Year. The Shanghai Composite Index is now down roughly 6% from the start of 2020 -- less than benchmarks in Japan and the U.S.

Chinese authorities have been pulling out all the stops to lift investor sentiment, including instructing state-owned banks to boost lending and temporarily halting short-selling. A net 1 trillion yuan ($141 billion) in mainland stocks have also been purchased through the stock connect with Hong Kong, an arrangement used by foreign investors to buy those shares.

Cash only left the mainland through the connect temporarily in February and March, when the Chinese economy took a big hit from COVID-19. With MSCI boosting the weighting of Chinese stocks in its indexes, market watchers expected overseas investors to continue buying these assets.

Now, there are worries about growing apprehension over Chinese companies. Fewer than 10 Chinese corporations have debuted in the U.S. so far in 2020 -- a much slower pace than in 2018 and 2019. This was due partly to the unicorn bubble bursting, but greater scrutiny of Chinese companies also played a role. Many initial public offerings last year failed to meet their targets or suffered steep declines at their debut.

"The growing political attention to U.S. financing of Chinese companies also raises the risks of moves to delist Chinese firms from U.S. exchanges," according to Hirson.

Chinese President Xi Jinping is working to bring major corporations listed in the U.S. or Hong Kong closer to home. Semiconductor Manufacturing International, China's largest chipmaker, delisted from the New York Stock Exchange last year and now trades only in Hong Kong. The company announced earlier this month that it will list on Shanghai's STAR market for high-tech shares.

Alibaba Group Holding undertook a secondary listing in Hong Kong in 2019, with other e-commerce platforms and game companies said to be preparing to follow suit.

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