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What Investors Need to Know About Potential White House Efforts to Block US Investment in China



reports that the White House may seek a reduction in capital flows in China, which turned Wall Street on Friday, as investors exposed to Chinese firms struggled to figure out what would lead to such moves.

Trump administration officials have been holding preliminary discussions about ways to curb Chinese companies from trading on US exchanges and curb portfolio inflows into China, according to Bloomberg News, citing people familiar with the matter.

This comes at a crucial time for US-China relations, with governments on both sides seeking a solution to their longstanding trade dispute. CNBC announced that a Chinese delegation, assisted by Deputy Prime Minister Liu He, will arrive in the US capital in October 1

0-11 for higher-level talks.

US stock markets ended lower on Friday with the S&P 500

SPX, -0.53%

and the Dow Jones industrial average

DJIA, -0,26%

posting weekly losses.

Here's what investors should keep in mind if broader pressures on US capital flows into China make further headway:

Exchanges

US Chinese listed companies are already under pressure for complaints that the rigor of the financial statements of Chinese companies is not to the same standard of US companies, exposing US investors to potential problems with corporate governance and outright fraud.

Two bilateral bills were introduced in Congress to push U.S. companies on the U.S. list to comply with U.S. audit rules, and if those companies fail to undergo regulatory oversight, they will face deletion .

Beijing has long been moving backward to allow overseas regulators to audit the audit work of local accounting firms.

Chinese companies have a large presence in the US capital markets. A total of 156 Chinese companies were listed in the US, with a market capitalization of around 1.2 trillion as of February 2019. The dollar. See : Regulators are resuming an audit dispute in China, but miss the initial opportunity to fully explain why

Chinese Internet giants listed in the US were badly affected by Friday's report. on Alibaba

BABA, -5,15%

stocks closed about 5,2%, and Baidu

BIDU shares, -3,67%

shares ended 3.7% in Friday trading.

KraneShares CSI China traded internet stock fund

KWEB, -3,80%

fell by 3,8%, while the wider iShares MSCI China ETF

MCHI, -2.18%

completed 2.2%, FactSet data shows.

Read : Huya, iQiyi, Nio, Luckin Coffee, Baidu, and Pinduoduo move sharply lower in the list announcement report

Disconnect

Interruption of US trade tension and China, some two years ago, led some Washington to push for a greater separation of financial ties between the two countries, by drawing Chinese stocks listed in the United States at the intersection of brighter members of Congress.

Analysts claim that this pressure may have forced some Chinese companies to look for other places to register. Alibaba has announced that it will hold its second ad in Hong Kong. However, those plans were delayed after the Asian financial center was shaken by protests over the past few months.

Sen. Marco Rubio is particularly keen on the need to monitor Wall Street ties with China.

In a June letter, Rubio asked MSCI, the global provider of securities indexes, what they were doing to ensure that US investors did not transfer money to Chinese government agencies or Beijing-affiliated companies.

"We can no longer allow the authoritarian government of China to profit from US and international capital markets, while Chinese companies avoid financial disclosure and basic transparency and put American investors and retirees at risk," Rubio told the chairman and CEO of MSCI's Henry Fernandez in a June 12 letter.

Later in August, he called on the Federal Investment Retirement Board, a federal government employee pension fund, to avoid comparing his funds to the MSCI All Country World ex-US Investment Market Index.

Rubio states that the index contains companies partially owned by Beijing such as Hikvision

002415, -0.03% ,

who were accused of complicity in human rights violations in Xinjiang.

Rubio has informed the White House what it is doing about its efforts for China and the US capital markets, a senator spokesman told MarketWatch. But the senator did not coordinate the actions reported by Bloomberg, the spokesman said.

However, it is not clear whether the US government can push global index providers not to include stocks from Chinese companies.

See : "Socially responsible" investors may inadvertently support police surveillance in China

Benchmarking

Patrick Chovanets of Silvercrest Asset Management worry that if US investors fail to include Chinese stocks and bonds in their portfolios, they could risk not performing well. This becomes an important issue as assets related to Chinese companies are now taking more weight in global indices, in line with China's growing economic and financial boom.

In May, MSCI tripled the weight of Chinese stocks listed on local stock exchanges in MSCI's emerging markets

EEM, -1.29%

to 3.3%.

Bloomberg Barclays and JP Morgan recently added Chinese government bonds and debt issued by the country's political banks to their indexes, even when FTSE Russell refused to do so on Thursday.


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