Background

On November 12, 2020, the Trump Administration signed an executive order banning US investors from acquiring shares in 31 Chinese companies that are affiliated with, or provide material support to the Chinese military. Under that executive order, US Persons (whether via segregated accounts, commingled accounts, mutual funds, or individual investment) will not be able to purchase any shares in the targeted Chinese companies after January 10, 2021. Any existing holdings in those 31 Chinese companies must be divested no later than November 11, 2021.

 

Initial Assessment

Our initial assessment is that, while many of these are large companies, the impact on investible publicly traded companies is fairly minimal. As of the end of September 2020, the 31 companies comprise approximately 1% of the MSCI Emerging Markets Index. China Mobile, at 0.6% of the index is the most significant, with no other stock exceeding 0.1%. According to UBS research, only about 10% of China Mobile shares are held by US investment firms. While the stock price fell on news of the executive order, there is little indication that the ban on foreign ownership will impact China Mobile’s operations.

 

Though the executive order has been in the headlines from an equity standpoint, there also would be a small impact to fixed income markets if the order proceeds. The J.P. Morgan EMBI Global Diversified benchmark includes 14 USD instruments across three of the 31 companies listed with an aggregate weight of 0.6% of the index, as of end of September 2020. China National Chemical, at 0.4% of the index is the largest. As the order stands, new debt issued by these companies will not be eligible for inclusion in the J.P. Morgan index going forward.

 

Ultimately, many unknowns remain.  While any potential ripple effects to the private market side will take time to play out, based on the current target list focused on large and listed shipping, aviation, construction, and telecom companies, there is likely no immediate impact to private markets.

 

Several managers have offered insight on the matter, but concern is limited based on the present wording and the companies covered by the executive order.  Managers would likely reevaluate their level of concern if there were any amendments to the order. In the meantime, as the executive order is presently written, they will have a full year to divest the little in holdings they might presently have. The same applies for passive index fund providers, through which many US investors have some Chinese equity and fixed income exposure. The executive order, if implemented, should allow for an orderly divestiture of these securities if it becomes necessary. In general, the wait and see approach seems to be prevalent.

 

There is a potential risk of other actions against China by the outgoing Trump administration as well as additional potential changes under the new administration. On the other hand, it is important to keep in mind that, because the sanctions are being imposed by executive order rather than an act of Congress, the executive order can be revised or cancelled by incoming President Biden at any time next year.  At the same time, legal challenges might delay the implementation of this executive order as has happened in the case of the TikTok ban recently.

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Geoffrey Seavey
Geoffrey Seavey
Asset Class Specialist, Equity Boutique

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