Reports that the White House may be looking to crack down on capital flows to China roiled Wall Street on Friday, as investors with exposure to Chinese firms struggled to understand what such moves would entail.
Trump administration officials were having preliminary discussions about ways to restrict Chinese companies from trading on US exchanges and limiting portfolio inflows to China, according to Bloomberg News, citing people familiar with the matter.
This comes at a sensitive time for US-China relations, with governments in both countries seeking a solution to their longstanding trade conflict. CNBC reported that a Chinese delegation, aided by Deputy Prime Minister Liu He, would arrive in the US capital on October 1[ads1]0-11 for higher-level talks.
US stock markets ended lower on Friday, with the S&P 500
and Dow Jones Industrial Average
and reported weekly losses.
This is what investors should keep in mind if a broader US capital inflow into China makes further progress:
US listed Chinese companies have already been under pressure over complaints that strict annual accounts of Chinese companies were not on the same standard as US firms, which exposed US investors to potential corporate governance issues and outright fraud.
Two bipartisan proposals have been introduced in Congress for the purpose of pushing US listed Chinese firms to comply with US audit rules, and if these companies failed to submit to regulatory oversight, they would face delisting.
Beijing has long pushed for moves to allow overseas regulators to investigate the audit work of domestic accounting firms.
Chinese companies have a large presence in US capital markets. A total of 156 Chinese companies were listed on the US stock exchange and had a market value of around $ 1.2 trillion as of February 2019.
See : Regulators relive China audit conflict, but miss the main opportunity to explain why
Chinese Internet giants listed in the United States were hit hard by Friday's report. Alibaba
stock closed around 5.2% and Baidus
shares ended lower by 3.7% in Friday trading.
KraneShares CSI China Internet Exchange Traded Fund
fell 3.8%, while the wider iShares MSCI China ETF
completed 2.2%, showing FactSet data.
Read : Huya, iQiyi, Nio, Luckin Coffee, Baidu and Pinduoduo move significantly lower on listing report
The outbreak of trade tensions between the US and China about two years ago has led to some Washington to push for broader disconnection of economic ties between the two countries, pulling Chinese stocks listed in the United States at the crossroads of more hawkish congressmen.
Analysts say this pressure may have led some Chinese companies to look for other listing sites. Alibaba announced it would hold its second listing in Hong Kong. However, these plans were postponed after the Asian financial center was shaken by protests in recent months.
Sen. Marco Rubio has been particularly vocal about the need to monitor Wall Street-China relations.
In a letter in June, Rubio MSCI, the global securities index provider, asked what they were doing to ensure US investors did not withdraw money into Chinese government agencies, or Beijing-related businesses.
"We can no longer allow China's authoritarian government to reap the benefits of US and international capital markets, while Chinese companies avoid financial disclosure and basic transparency, putting US investors and retirees at risk," Rubio told MSCI Chairman and CEO Henry Fernandez in a letter dated June 12.
Later in August, he requested the Federal Retirement Thrift Investment Board, a federal government employee pension fund, to avoid benchmarking the funds of the MSCI All Country World ex-USA Investable Market Index.
Rubio said the index included companies partially owned by Beijing as Hikvision
002415, -0.03% ,
who have been accused of being an accomplice in human rights violations in Xinjiang.
Rubio has told the White House what he is doing with regard to his efforts against China and the US capital markets, a spokesman for MarketWatch's senator said. But the senator did not coordinate the actions reported by Bloomberg, the spokesman said.
However, it is not clear whether the US government can pressure global index providers not to include shares from Chinese firms.
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Patrick Chovanec of Silvercrest Asset Management was concerned that if US investors could not include Chinese equities and bonds in their portfolios, they could risk underperforming their benchmark indices. This has become a topical issue as assets linked to Chinese companies are now gaining greater weight in global indices, in line with China's growing economic and economic heft.
In May, MSCI quadrupled the weight of Chinese stocks listed in domestic bourses in MSCI Emerging Markets
Bloomberg Barclays and JP Morgan have recently added Chinese government bonds and debt issued by the country's political banks to their indices, even when FTSE Russell refused to do so on Thursday.