The exchange-traded fund (ETF) industry in Taiwan has been closely watching for fallout from a June 3 executive order signed by US President Joe Biden. The order seeks to fight repression and human rights abuses by banning Americans from investing in 59 companies that have ties to the Chinese military or sell surveillance technology. It also bans investment in funds that hold the blacklisted Chinese securities in their portfolios.
Continuing a campaign initiated in November last year by former US president Donald Trump, Biden’s executive order increased the number of blacklisted Chinese firms from 44 to 59. The list not only includes telecom giant Huawei Technologies Co and China’s top chipmaker, Semiconductor Manufacturing International Corp, but also video surveillance equipment maker Hangzhou Hikvision Digital Technology Co, Avic Aviation High-Technology Co, Avic Shenyang Aircraft Co and Cosco Shipping Holdings.
Biden’s order took effect on Aug. 2 and US investors have one year to divest shares of the blacklisted Chinese firms. That day, S&P Dow Jones Indices, which maintains the Dow Jones Industrial Average and the S&P 500, deleted 25 Chinese firms from its indices, while the FTSE Russell, a provider of stock benchmarks, had removed 20 firms by July 28.
Taiwanese investors might think that the US executive order has nothing to do with their portfolio, but if they own an ETF that must comply with the ban, the fund will no longer hold the blacklisted Chinese firms, which might have been some of the firms they were interested in.
However, some Taiwanese investors might still have exposure to the blacklisted Chinese firms through the 35 ETFs operated by local fund managers. Holding shares in these companies with ties to the Chinese military is likely threatening Taiwan’s national security, such as when Chinese aircraft encroach on Taiwan’s air defense identification zone.
The blacklisted Chinese firms might remain in some local ETFs because the managers have not yet rebalanced their investment allocations, or the managers might only be mirroring changes made by global index providers, with the firms staying in a manager’s portfolio because the firms remain part of an index provider’s benchmark.
Regardless, investors trust fund managers to pursue returns against changes in global trade, economic prospects and geopolitical issues. Managers should also target investments that contribute to sustainable development, or comply with so-called “environmental, social and governance” principles, as well as investments that contribute to Taiwan’s national security and democratic values.
For example, Hangzhou Hikvision Digital Technology’s products are reportedly used by Beijing to monitor Muslim minorities at camps in China’s Xinjiang region. Avic Aviation High-Technology mainly develops composite materials used in military aviation, while Avic Shenyang Aircraft manufactures military aircraft, including almost all Chinese fighters since 1951.
On Friday, the Securities Investment Trust and Consulting Association issued a statement saying that it is aware of the issue and is working with local fund managers to communicate with index providers in the hope of excluding the blacklisted Chinese firms from their benchmarks and investment portfolios as soon as possible.
Worsening US-China tensions have increased the risk of investing in Chinese stocks listed in the US. The Financial Supervisory Commission, the Taiwan Stock Exchange, and the Securities Investment Trust and Consulting Association should watch for developments and promptly step in to safeguard investors’ interests.
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