The threat of the US attempting to cut China from US capital markets could be closer than ever as media reports from CNBC and Bloomberg last week suggested that the Trump administration is pondering a menu of options which include delisting Chinese equities from US exchanges, compelling US firms to limit inclusion in indexes as well as capping investment via government pension funds.
Despite the US Treasury later denied that any move to restrict US listing by Chinese companies was imminent and the White House Trade Advisor Peter Navarro also called the reporting as “fake news”, global investors remain sceptical and tends to believe that the Trump Administration are really studying the possibilities of the options. The outcome could easily come true in particular if the forthcoming round of US- China trade talk on Oct 10-11 disappointed the President Trump again, resulting in some new bets of capital and FX controls measures to China.
Trump’s threat to restrict US capital flows to China could impact global financial markets at least in short-medium term, as a recent study from Goldman Sachs estimates that US investors have around US$785bn exposure in Chinese equities as of Sep 2019, of which $75bn, US$335bn and US$375bn will be in China A shares, Hong Kong (H shares, Red Chips and P Chips) and the ADR markets, which representing 1%, 14%, and 33% of the total listed market cap in the respective exchanges. Therefore, the impacts to Hong Kong and ADRs are obviously larger, which may take around 180 and 195 days if US investors were to liquidate all their holdings in Chinese stocks.
On the other hand, Goldman Sachs also noted that 224 Chinese companies are currently listed on US exchanges with an aggregate listed/free-float market cap of US$1,137/826bn, which representing 3.0%/2.2% of the total cap in the US. However, the distribution is heavily skewed towards a few mega-cap stocks, especially Alibaba accounting for almost 38% of the outstanding listed market cap in the China ADR universe.
Likewise, the US has been one of the 3 most popular markets for capital raising for Chinese companies. There were about 100 Chinese companies have raised a total of U$47 billion over the last five years. However, the amount raised from US IPO is less significant if compared to the onshore China and in Hong Kong market, which has raised a total of US$124bn and US$120bn of funding for Chinese companies during the same period.
In a nutshell, the proposed capital flow restriction to China is definitely one of the key risk factors that investor should monitor over the next 3-6 months, especially it would be a risky move at a time when global markets are fretting about an economic slowdown. It is true that Chinese companies will be directly hit by capital controls in the short-term, but US is likely to pay its costs too. The US investment bankers will likely to lose the opportunities to earn multi-millions of dollars in listing fees, while at the same time it will potentially weaken the US’s position as a global financial and capital hub in the long-run given that China is the world’s second-largest economy with a lot of the fastest-growing companies there.