Clouds darken over Chinese tech
After some confusion, the New York Stock Exchange has announced that it will delist three major Chinese telecom companies: China Telecom, China Mobile and China Unicom (Hong Kong). This de-listing, on foot of Executive Order (EO) 13959, will come into effect on 11 January 2021, but US investors have up until 11 November 2021 to divest their holdings in the targeted companies.
The Executive Order forbids US persons from investing in the securities (or their derivatives) of companies deemed to be related to Chinese military activities. There is currently a total of 35 companies targeted, with the latest four added on 4 December. The full scope of the Executive Order remains uncertain as entities with names that match closely those already targeted could also be caught up in the investment ban. Executive Order 13959, signed by outgoing president Trump on 12 November last, should be seen in the context of widening tensions between China and the US, which are now spilling into restrictions on capital flows. The Order was followed in December, by the passing into law of the Holding Foreign Companies Accountable Act (HFCAA), which held out the possibility of forcing Chinese stocks to delist from US exchanges unless regulators are able to inspect their financial audits within three years.
The environment is becoming challenging for Chinese technological companies in other ways too. Although Alibaba, the most prominent and valuable internet platform in China, has been the target of many regulatory actions recently (cf. Ant Financial’s scrapped IPO), other leading companies have also come under scrutiny. Last December, the State Administration of Market Regulation imposed fines on JD.com, Vipshop and Tmall (which belongs to Alibaba) for price manipulation, while it also fined subsidiaries of Alibaba and Tencent for failing to disclose mergers.
Biden’s win in the US presidential election and the Democrats winning of control of both parts of Congress are positive to the extent that the new administration could be less unpredictable and more multilateralist than the previous one. Nevertheless, we remain of the view that US/China tensions are here to stay and that there is no reason to expect them to ease significantly for now. Furthermore, the outgoing Trump administration may try to impose further action by 20 January). On China’s side, authorities seem keen to rein in the power of big tech companies, drawing from the experience of the US. In this context, we reiterate our short-term cautious stance on the offshore Chinese equity market relative to the overall emerging-market equity space.