Trump to restrict investment in Chinese stocks

With index trackers that exclude certain companies or countries now mainstream, excluding Chinese shares for US investors sounds feasible.

On Friday. reports emerged that the White House was considering ways to limit US investment into the Chinese stock market. How this would be achieved is unclear. After the news broke, there was speculation that this could include limiting the amount pension funds can invest in the mainland China market. 

Rumours that it would include limitations on Chinese listing in New York, however, were quickly put to bed by the US Treasury. It issued a statement saying:

"The administration is not contemplating blocking Chinese companies from listing shares on US stock exchanges at this time."

Whatever the exact method chosen, the stated intention to limit US investment in Chinese stocks is the potential opening of a new front in the US-China trade war. What does it mean for UK-based investors?

First, the news was greeted by stock market sell-off. Stocks in China fell to their lowest level in almost a month on Friday, while US markets also took a hit. Particularly affected were New York-listed Chinese companies such as Alibaba (NYSE:BABA), which lost 5%. US companies with heavy China exposure, such as Apple (NASDAQ:AAPL) and Boeing (NYSE:BA), also saw declines.

Such daily volatility is usually best ignored by investors. But, warns Ben Yearsley, director of Shore Financial Planning, those daily declines could portend lower prices for China stocks, should the US succeed in restricting US investor access. 

Yearsley says: "If US investors are forced to divest existing holdings, you could easily see share prices fall sharply, making a cheap market even cheaper. 

"It does depend on how President Trump tried to enforce it. Would he, for example, limit the capacity of US companies running index funds to include Chinese companies in the indices they produce? If that was the case, there could be a wider impact."

With indices and index trackers that exclude certain companies or countries (often for ESG reasons) now mainstream, the idea of global or emerging market index trackers sold to US investors excluding China sounds feasible. 

It is also worth noting that the MSCI indices only started to include Chinese mainland shares (known as A-shares) in 2018. Reversing this decision, even if just for US-based investors, would not be too hard. 

Beyond this, however, the news points to further market volatility. Any attempt to limit US investment is China is likely to be seen as a further escalation of the US-China trade war and another step towards the so-called decoupling of America's and China's economies. All of that is likely to prove economically and financially destabilising. 

Jason Hollands, managing director of Tilney Bestinvest, notes:

"The US-China trade war is already at risk of opening a second front in the form of currency war. Extending this to place restrictions on investment flows into China would be highly damaging for all parties, especially the US itself, given the high level of US Treasuries held by the Chinese – who would be sure to retaliate."

However, Hollands is not too concerned, arguing:

"This probably amounts to a kite-flying exercise by the administration in a game of brinksmanship to put pressure on China in trade talks, rather than a credible policy option."