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Limiting US investment in China could hurt the US, analysts say



PAGING – Possible US restrictions on investing in Chinese companies would not only have a limited effect on China – but could also hurt the United States, CNBC analysts said.

The comments are at the back of reports that the White House is considering restricting investment in China, such as eliminating Chinese stocks in the United States and limiting government pension funds' investments in the Chinese market.

Restrictions such as deletion of Chinese stocks in New York may send the message that "the US is not as open as before. It will have a rather large impact," Ning Zhu, a professor of finance at Qinghua University in Beijing, told CNBC in a phone interview on Sunday.

US shares closed lower on Friday after Bloomberg first reported the news. The KraneShares CSI China ETF (KWEB), which tracks major Chinese Internet-related companies listed in New York or Hong Kong, fell 3.8%.

Analysts say the reported restrictions could be an effort by the White House to gain leverage in the upcoming US-China trade talks.

It is unclear how close, if at all, the White House is to announce investment restrictions in the US.

US Treasury Department Assistant in Public Affairs, Monica Crowley, said in a statement over the weekend that "the administration is not considering blocking Chinese companies from listing on US stock exchanges at this time. We welcome investment in the United States."

The Securities and Exchange Commission of China did not respond to a facsimile request for comment.

Non-US Options

If the US exercises such investment restrictions, it would be difficult to apply and adversely affect the US capital markets, Zhu said. "Financing is unlike military or export orders or trade. Financing is much harder to track. ”

Many Chinese startup companies have chosen to list in the US to promote their brand and access to US dollars. [1

9659012] US banks, US mutual funds companies will be at a disadvantage to their global competitors.

Ning Zhu

Professor of Finance at Tsinghua University

More than 200 Chinese companies, including giants such as Alibaba, have raised tens of billions of dollars in US capital markets through lists or US depository receipts, according to an August analyst report research firm Gavekal Dragonomics, Andrew Batson and Lance Noble.

However, not all major Chinese companies have chosen to list in New York.

Tencent, a parent of the WeChat messaging app and a major mobile game developer, is listed in Hong Kong. Smartphone maker Xiaomi and food delivery company Meituan-Dianping also posted in Hong Kong last year. London is another alternative, Ju said.

The Chinese government would also like to keep its largest companies at home and in July launched a new board in an effort to create a better environment for technology companies to become public. Missed Opportunities

On the other hand, foreign investment in mainland Chinese stocks remains limited, even as Beijing seeks to open its markets further to foreign investors. As the internal stock market is dominated by retail investors, the authorities are trying to attract a more stable inflow from institutional investors.

MSCI's global equity provider is also gradually adding some Continental Chinese A shares to its key emerging markets index, and more than $ 1.9 trillion of assets have been included in the benchmark by the end of 2017.

In April, Bloomberg Barclays global aggregate index began to add Chinese bonds. JP Morgan also announced that it will include Chinese debt in its core bond index early next year.

The full inclusion of Chinese assets in these stocks and bond indices would mean that many Americans would be indirect investors in the Chinese capital markets through mutual funds and other widespread investment products.

If such investments in the United States were banned, American investors would miss what many analysts expect would be a story of long-term growth.

"While there may be other political reasons for restricting US capital flows to China, Washington needs to understand that the effects of trade imbalances are the opposite of what they want," says Michael Petis, finance professor at the Guanghua School of Management at Beijing University, according to an email.

"If US capital to go to China stays at home, it inevitably means that US net capital imports will increase, and thus the US current account deficit will decrease – not with China, but in general, "Pettis explained.

In addition to encouraging greater foreign participation in its capital markets, China is also seeking to increase external access to its financial services industry. Some communications over the last 18 months include a foreign bank's permission to take a majority stake in a local securities joint venture.

If this trend continues, no matter how slow, the ban from China will mean "US banks, US mutual funds companies will be disadvantaged by their global competitors," said Zhu.

Fraud, transparency concerns [19659010] One reason the White House is considering limiting investment is to say that it is protecting US investors from excessive risk because of the lack of regulatory oversight of Chinese companies. R. He said that many Chinese companies that had access to US public markets around 2010 did not receive any consequences for fraudulent behavior.

Continental Capital Markets China is among the largest in the world, but often falls short of governance and liquidity levels.

Last week, FTSE Russell decided not to add China to its widely tracked government bond index due to problems such as lack of trade and debt. and settlement periods, according to Reuters.

An analysis of New York-based research provider Rhodium, published in the fall of 2018, also found that 65% of Chinese companies included in the MSCI Emerging Markets Index at the time were ultimately controlled from the country.

At that time, MSCI said in a statement to CNBC it did not comment on third party reports.

"The presence of state-owned enterprises (state-owned enterprises) is not a unique phenomenon in China, but common to many emerging markets … All companies, incl. ding SOEs are treated equally as long as they meet the eligibility criteria of the index, "the statement said.


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