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US-China tensions

Trump bars US investment in military-linked Chinese companies

President's first postelection order stays the course on financial decoupling

Trump's executive order bans Americans from investing in Chinese companies that the administration says supply China's military.    © Reuters

NEW YORK/HONG KONG -- In his first executive order since last week's election, U.S. President Donald Trump moved Thursday to ban Americans from investing in Chinese companies identified as having military ties.

Taking effect Jan. 11, the order would prohibit "any United States person" from holding securities, directly or through funds, in companies deemed to have links to China's military. The Department of Defense has identified 31 such enterprises. Investors already holding such assets will have until November 2021 to shed them.

The country's three main network operators, China Telecom, China Unicom and China Mobile, were among the targets of Thursday's ban.

The core listed units of the trio saw their shares tumble on the New York Stock Exchange, with China Telecom dropping 5.3%, China Mobile 4% and Unicom 4.8%. The sell-off continued Friday in Hong Kong, with the trio sliding 7.8%, 5% and 6.6%, respectively.

On Friday night, the three mainland carriers separately issued statements on the Hong Kong exchange's official website. China Telecom said it is "currently assessing the impact," and China Mobile is "paying close attention" to the latest developments in Washington. China Unicom is also "reviewing the potential consequences" in order to "develop a fuller understanding of its impact," while it is "reviewing and considering appropriate steps to protect its and its investors' lawful rights."

Despite these statements, their shares traded in New York further fell by 7.5%, 4.2% and 5.9%, respectively, on Friday.

Further in Hong Kong, China State Construction dropped 6.1%, while railway-sector companies CRCC and CRRC slid 4.1% and 3.8%, respectively.

The U.S. list is dominated by companies controlled by the central government in Beijing, but according to research by Nikkei Asia, more than 120 listed companies are affiliates of the blacklisted entities. Most of these are traded in Hong Kong, Shanghai or Shenzhen, but a few are listed in Europe.

It is not clear, though, whether affiliates not named by the executive order will be affected or whether it will apply to American managers of funds registered in other markets, according to telecoms analyst Edison Lee of Jefferies.

The executive order, coming near the end of Trump's term, is only one of his many executive actions to curb China's rise by taking aim at some of its biggest names, such as Huawei Technologies and ByteDance-owned TikTok.

"Though remaining ostensibly private and civilian," the companies targeted form part of Beijing's military-civil fusion strategy and "directly support" the Chinese military, intelligence and security apparatuses, the executive order said.

As these businesses tap U.S. capital markets, China "exploits United States investors to finance the development and modernization of its military," it said.

Others on the Pentagon's blacklists, released in June and August, include surveillance camera maker Hangzhou Hikvision Digital Technology, and energy and chemical conglomerate Sinochem. While Hikvison and Sinochem's listed subsidiaries are not traded on major U.S. exchanges, they have been included in index funds carried by such giants as Vanguard and BlackRock.

The executive order "serves to protect American investors from unintentionally providing capital that goes to enhancing the capabilities of the People's Liberation Army and People's Republic of China intelligence services," said Robert O'Brien, Trump's national security adviser, in a statement issued Thursday.

The order also came months after the Trump administration pressured one of the country's largest pension funds to halt a plan to pour billions of dollars into an index including Chinese companies, sparking worries over an accelerated financial decoupling between the world's two largest economies.

Dan Wang and Thomas Gatley of research company Gavekal labeled the order "tantamount to a forced divestment for U.S. investors," and noted it came after an effort to pressure public pension funds to stop investing in Chinese securities.

The relatively mild investor reaction suggests investors harbor doubts about the impact of the executive order. Both the Gavekal and Jefferies analysts said it could be legally challenged or reversed by the incoming administration of President-elect Joe Biden.

"There is a fair chance he will do so as part of his broader efforts to recalibrate parts of the bilateral relationship," Wang and Gatley wrote in a client note on Friday.

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