The consequences of U.S. sanctions against Chinese military companies have increased as banks and financial managers scrambled to comply with a vaguely drafted executive order from Donald Trump that bans new investments from Monday.
Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. to remove 500 structured products in Hong Kong, files show. The city is the world’s largest market for these contracts, with over 12,000 of them, according to Hong Kong Exchanges and Clearing Ltd.
Products being withdrawn include redeemable warrants and high / low contracts redeemable on the Hang Seng benchmark, the Hang Seng China Enterprises Index and China Mobile Ltd. The $ 14 billion Hong Kong Tracker Fund managed by State Street Global Advisors Asia Ltd., the majority of the island’s actively traded ETF, will not make new investments in companies covered by the ban after saying that it is no longer “appropriate” for American investors.
Investors have been struggling to get more clarity on how regulators, exchanges and intermediaries will implement the order that Trump issued in the last days of his presidency. The New York Stock Exchange said last week that it will withdraw China Mobile and two other Chinese telecommunications companies. MSCI Inc. excluded shares from its global benchmarks on Friday, triggering a sales race that led to a record share trading volume and brought China Mobile’s share price to a 14-year low.
Trump’s order said that designated shares cannot be purchased by Americans as of January 11, and that Americans’ shares are expected to be fully sold by November, when transactions will be frozen.
For banks, index compilers and money managers, this has increased the challenges of dealing with the tensions between Washington and Beijing that have increasingly entered the financial sphere. China issued new rules on Saturday to protect its companies from “unjustified” foreign laws that will allow Chinese courts to punish global companies for complying with foreign restrictions.
“This will create a huge dilemma for companies,” said Jingzhou Tao, an arbitrator at the Arbitration Chambers, in an interview with Bloomberg Television. “On the one hand you have these US sanctions that you must observe, otherwise you will be sanctioned by the US government, on the other hand you have the Chinese government, if they say that you should not comply with these sanction laws, then you’re in a big dilemma. “
The Hang Seng index closed 0.1% higher, taking this year’s gain to 2.5%.
The withdrawal of products from the Hang Seng Index and the warning by State Street that U.S. investors should avoid the tracking fund show how the Trump order is affecting investment flows beyond just a handful of Chinese companies on the sanctions list. from the USA.
The approximately 500 structured products being removed from the list represent less than 1% of the Hong Kong market volume of business, according to Bloomberg Intelligence.
Even though banned companies represent a small fraction of a widely followed index, sanctions can force money managers to divert billions of dollars of products linked to that index. It’s one of the reasons why MSCI, FTSE Russell and S&P Dow Jones Indexes they all adjusted their equity indicators to remove banned companies like China Mobile. Hang Seng Indexes Co. said on Friday that it has no plans to change its benchmarks for the time being, although it closely follows “market developments”.
The Hong Kong exchange said it was working closely with banks to ensure orderly withdrawals. “We do not believe that this will have a significant adverse impact on the Hong Kong structured products market,” said the exchange in a Sunday statement. The city’s securities regulator said it has also maintained a close dialogue with affected issuers and reminded them to carefully assess the impact of U.S. sanctions on their products.
– With the help of Amanda Wang
(Updates with Hang Seng closing price in the 8th paragraph. Adds comment from Bloomberg Intelligence in the 10th paragraph.)