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Trade war

Washington hawks take China fight to Wall Street

Trade tensions spill over into capital markets

A version of Wall Street's famous bull sculpture in Shanghai: China is liberalizing its financial markets to head off the threat of capital flight.   © AP

NEW YORK/SHANGHAI -- Capital markets have turned into another battleground for the trade war as hard-liners in Washington seek a clampdown on Chinese businesses while Beijing loosens investment restrictions to draw money from the U.S. and beyond.

An anti-China group co-founded by Steve Bannon, formerly a senior adviser to U.S. President Donald Trump, recently decried a government pension fund's policy change that will involve buying Chinese equities starting in 2020.

The Federal Retirement Thrift Investment Board's decision to track an MSCI index with Chinese components will result in government employees "being compelled to have their retirement funds invested in the stocks of Communist Chinese companies," said a statement by the Committee on the Present Danger: China.

Communist Party-owned or -linked companies have been hit by U.S. sanctions, implicated in human rights abuses, and involved in "activities threatening to America's national security and vital interests," the statement said. Sen. Marco Rubio, a member of Trump's Republican Party, voiced similar concerns in an August letter to the fund and top Trump administration officials.

For many China hawks, the ultimate goal is to decouple the U.S. and Chinese economies, severing a relationship seen as harmful to American interests. Trump's tariffs go some way toward this end by erecting barriers to trade. But hindering Chinese businesses' access to U.S. capital markets will turn up the heat further, the thinking goes.

The political pressure puts American pension funds in a difficult position, as excluding China from their portfolios could mean missing out on profitable investing opportunities.

One state government fund held internal discussions to prepare for expected questions from legislators but could not reach a conclusion, an asset manager there said.

Chinese companies listed in American markets also face tougher conditions. A bipartisan group of lawmakers, including Rubio, introduced legislation in June to force U.S.-listed Chinese enterprises to submit to oversight from which they have been partly shielded by Beijing. The Securities and Exchange Commission warned last year about the difficulty of accessing audits and other information for China-based companies.

Amid these headwinds, Chinese businesses are growing less eager to raise capital in American equity markets. Just nine conducted initial public offerings in the U.S. in the first half, four fewer than a year earlier. Online lending company Samoyed Holding scrapped in August plans to list in New York, citing "unfavorable market conditions."

But whether the Trump administration will move to impose actual sanctions in capital markets remains unclear. Restrictions on IPOs could cut into a flow of income that American financial institutions count on.

China, meanwhile, is moving in the opposite direction, opening its doors wider to investment from abroad as a weaker yuan reignites fears of capital flight.

Beijing will eliminate foreign ownership restrictions in the banking, brokerage and insurance industries next year, People's Bank of China Gov. Yi Gang has said.

The anti-China sentiment in corners of Washington is not stopping major American financial institutions from seizing on the opportunities presented by the deregulation drive. Goldman Sachs has applied to take a majority stake in a local joint venture, and rivals including JPMorgan Chase are taking similar steps. Asset management firms Vanguard and Invesco are diversifying Chinese operations.

Speculation periodically surfaces about American, Japanese or European financial institutions investing in or outright buying Chinese brokerages or banks. Such moves would mean more foreign capital flowing into China, which is in Beijing's interests as well.

The pension fund investments that have irked American hawks also relate to the internationalization of Chinese financial markets as decisions in recent years by leading stock index providers shape portfolio decisions. MSCI decided in 2017 to add Chinese enterprises to certain indexes, and U.K.-based FTSE Russell is among those that have followed suit.

Chinese companies themselves are turning their attention back home. Semiconductor Manufacturing International, China's largest chip foundry, delisted its American depositary shares from the New York Stock Exchange in June. New York-listed Alibaba Group Holding reportedly plans a second listing as early as this fall, in Hong Kong.

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