18 Dec 2020 Index providers drop Chinese companies that have been labeled by the U.S. government as having ties to the Chinese military

Posted at 15:53h in Companies, Corporate Governance, Financial Institutions by
MSCI, along with other predominant index providers, drops seven Chinese companies that have been labeled by the U.S. government as having ties to the Chinese military. Will this decision impede the international inflow of capital to China? What strategic importance does such a removal entail? Will a Biden presidency reverse these actions?
 

Following an executive order signed by Trump last month, MSCI, along with other predominant index providers, drops seven Chinese companies that have been labeled by the U.S. government as having ties to the Chinese military.  The companies will be removed from MSCI’s global equity indices at the end of the trading day on January 5.

The seven companies accounted for roughly 0.3 percent of the value of the MSCI Emerging Markets Investable Market index with 3,000 stocks. MSCI is the latest of the largest global index firms to announce its decision on the matter. FTSE Russell, Nasdaq, and S&P Global Dow Jones Indices have already taken actions to comply with the executive order.

The seven companies include China Railway Construction Corporation, China Communications Construction Company, and SMIC, the country’s largest chipmaker and a major producer of surveillance equipment, among others. SMIC was already hit by U.S. sanctions on grounds of unacceptable risk related to the military end use earlier this year after penalties on Huawei. Such a succession of sanctions reveals the determination of Trump’s administration to contain the development of chipmaking in China which is deemed with strategic importance in this era. Moreover, Hikvision, a surveillance camera company will also be removed by MSCI. Hikvision has been accused of supplying equipment for the detention camps in Xinjiang, where the Chinese government has held an estimated 1 million Muslim Uighurs.

This decision ‘sends a signal the geopolitical factors may overcome investors’ interests in being exposed to China’s growth’, said Drew Bernstein, co-chairman of MarcumBP, which audits and advises pre-IPO and public Chinese companies. China’s Ministry of Foreign Affairs insists this change ‘won’t prevent international investors from investing in these firms and share the growth of China’s economy’ and underscored that Trump’s order would only undermine the interests of global investors and damage the reputation and national interests of the U.S. However, as mentioned by Bernstein, the increased weighting of the Chinese equities in the indexes, especially MSCI, has been an important driving force in the increased inflow of capital to China to date.  The removals will, therefore, undoubtedly adversely impact and limit the international inflow of capital to these companies.

The order from Trump’s administration is not out of the blue. Due to the heightened US-China tension, a stronger stance towards China regarding certain issues have reached a bipartisan consensus. This can be reflected by the fact that the Hong Kong Human Rights and Democracy Act, which imposes sanctions on officials considered responsible for human rights abuses in Hong Kong, was passed in both houses swiftly with the support of both parties.

Will a Biden presidency turn the tide? The answer is still unclear. Early in his campaign, Biden rejected the notion that China was much of a worry. He also blatantly mentioned that he would remove the tariffs imposed on Chinese goods. However, personal inclinations aside, as president-elect, Biden has yet to flesh out his plans. Considering the bipartisan consensus on a tougher stance against China, the China-US policy is doomed to be the biggest foreign policy challenge for Biden’s term.

 

 

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