Mon, Sep 30, 2019 page16

• Chinese markets must test risk of worst US threat yet

  • Bloomberg
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  Citigroup Inc has termed it the most extreme potential US move against China in the escalating rivalry between the world’s largest two economies: Restricting access to US finance.

  Traders in China’s markets have to decide how to price that risk today — just before the start of a week-long holiday — after Bloomberg reported that US President Donald Trump’s administration is discussing ways to limit the use of US money going to Chinese entities.

  The MSCI China Index fell 1.6 percent on Friday.

  The US Department of the Treasury said there are no plans to block Chinese firms from listing on US exchanges, although it did not address the potential for other moves.

  The Treasury and US National Economic Council are wary of the market reaction to any moves to restrict financial ties, and are working to ensure any plan would not spook investors, people familiar with the deliberations said.

  US investment in China’s domestic markets is limited — residents had US$203 billion of long-term mainland Chinese financial assets as of June, little more than double that held in South Africa, according to the US Treasury.

  Far bigger is the US$1.2 trillion market capitalization of Chinese companies on three key US exchanges as of February, a report by the US-China Economic and Security Review Commission said.

  “It obviously adds yet another layer of uncertainty and does not bode well for a positive outcome for coming trade negotiations,” said Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte Ltd in Singapore. “It will force Chinese firms to relist in Hong Kong and China.”

  While China has sought to increase the attractiveness of its stock and bond markets, to Chinese firms seeking capital as well as to global funds looking to diversify, the reliance of companies, including Alibaba Group Holding Ltd (阿里巴巴), on foreign exchanges exposes vulnerability.

  Just this month, the country removed a hurdle for foreign investment into its stock and bond markets almost 20 years after it first allowed access.

  Shifting all those listings home would pose major strains for the onshore financial system.

  China has itself launched a new market to encourage its technology firms to list at home.

  The STAR board in Shanghai was designed with looser trading rules in part so that Chinese start-ups would pick mainland exchanges over those in the US or Hong Kong, but the buzz among investors has started to fade.

  The news on discussions in Washington, comes at a time when US-China trade tensions have been less of a challenge for domestic equities.

  The Shanghai Composite Index as of Friday was up 1.6 percent for this month.

  Today is the last chance for traders to act on the new risk before a prolonged market closure to mark the 70th anniversary of the Chinese Communist Party taking power. Exchanges are then to be shut until Tuesday next week.

  There is no indication that any moves by the US are imminent, and bilateral high-level trade talks with China are still scheduled for next week, but Friday’s reports showcase the danger of a new front in the two countries’ confrontation.

  Proposed US legislation that aims to delist foreign companies from US stock exchanges that contravene accounting and oversight rules, if passed, could “have a profound impact” for the more than 200 Chinese companies trading on US exchanges, Citigroup economist Cesar Rojas wrote in a report last month titled The Most Extreme US Potential Retaliation: Blocking China’s access to US (financial) markets.

  Any wholesale shift of Chinese initial public offerings to Hong Kong and China would hurt “new economy” enterprises, as the “US capital market is much deeper,” Bank of America Corp strategists led by David Cui (崔偉) wrote in June.

  Another risk: The two countries engage in a currency war as China promotes global use of the yuan, aiming to erode the “strategic advantage” that the US has with the US dollar’s role in the global financial system, Cui and his team wrote.

  For now, strategists at Goldman Sachs Group Inc are keeping their near-term target for the yuan to drop to 7.2 per US dollar.

  That is “in light of renewed uncertainty around portfolio flows,” along with the expectation that the US proceeds with the next round of tariff hikes as scheduled on Oct. 15,” Zach Pandl and colleagues wrote in a note on Friday.
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