On Thursday, President Joe Biden largely upheld an earlier Executive Order by the Trump Administration that bans U.S individuals and entities from investing in Chinese companies connected to the People’s Liberation Army and the Chinese surveillance state. Fifty-nine Chinese companies were named.
After further review, it is clear that despite some companies delisting from the NYSE, some major Wall Street firms invest directly in them via Hong Kong, Shanghai, and Shenzhen anyway.
While it is unclear if they still own those stocks due to the quarterly lag in financial reporting, Vanguard owned over $1.2 billion and tens of millions of shares in nearly every single company sanctioned by the Trump and now Biden administration. That includes companies like AVIC Shenyang Aircraft Corporation, which makes PLA Air Force fighter jets, bombers, and drones. Vanguard owned over 200 million shares of that Chinese military contractor as of January 31, 2021.
They are not alone.
BlackRock owns the company’s shares as a tiny portion of its iShares MSCI China exchange-traded fund and in their iShares MSCI Emerging Markets ETF.
Anyone invested in those two ETFs, including American retail investors, has a couple of hundred dollars, or maybe tens of thousands of dollars, invested in the Chinese military.
Capital Group’s Europacific Growth Fund had 14.7 million shares of Hikvision as of December 31, 2020. Their holdings in China’s Big Brother surveillance camera manufacturer stood at more than $700 million at the end of last year, or around 4.3 billion yuan.
Other than being ubiquitous in Chinese cities, Hikvision is more infamously known as being the surveillance technology of choice at Uyghur “re-education camps” in Xinjiang. Both the Biden and Trump administrations have said that the Chinese Communist Party is committing genocide against the Uyghurs.
Last month, China’s three biggest publicly traded telecoms on the NYSE were delisted after losing their appeal to a Trump order to kick them out of U.S. capital markets.
It is unclear if they still own it, but Thornburg Investments as recently as March 31, 2021 had hundreds of millions of shares in China Telecom, one of the three delisted entities. Their position in China Telecom in Hong Kong was worth more than $1.2 billion at the time.
Nearly every known Wall Street firm is invested in Chinese stocks listed in mainland China and Shanghai, and that includes companies that were singled out by the Trump administration last year. Major fund managers like Charles Schwab, TIAA-CREF, Fidelity, State Street, and PIMCO are all invested.
Under Biden’s update to the Trump EO, fund managers will now have two months of free trading in and out of those positions, then it’s over.
By August, they can no longer buy securities of the 59 companies on the new Biden list, including bonds connected to Huawei through a company called Proven Glory Capital and Proven Honor Capital. Both are international fundraising mechanisms for Huawei.
By next July 2022, U.S. investment funds would have had to liquidate or sit on their positions. They will no longer be allowed to trade in and out of them.
To put a monetary impact of this EO on Chinese companies, assuming Vanguard sold all of the 42 million shares it had in three different mutual funds invested in China Shipbuilding Industry Co. as of January 31, 2021, it would be the equivalent of a 1.1 billion RMB loss to the state-owned shipbuilder.
Last year, Fidelity said it would comply with any restrictions.
Trump’s November 2020 executive order prohibited any American company or individual from owning shares in Chinese companies that the U.S. Department of Defense listed as being “Communist Chinese Military Companies.”
Biden upheld that order yesterday but transferred authority to the U.S. Treasury Department instead of the Pentagon.
Wall Street holds a lot of sway inside Treasury, and for decades Washington gave Wall Street a free pass to help the Chinese Communist Party raise money from U.S. capital markets. While it is good news that the Biden administration left the Trump-era rules in place, Wall Street’s historically close relationship with Treasury is an area of concern.
From Wall Street’s point of view, these are not the big, sexy growth stocks they prefer – like Alibaba and Baidu, for example. Or stocks in the EV car space. Hong Kong-listed Semiconductor Manufacturing International Corp, best known simply as SIMC, counts no American firms as major holders. British bank HSBC has a small position in one of its ETFs sold to American investors.
We do believe more companies will be added to the list. They will either be affiliated with China’s defense or possibly Xinjiang and its actions against the Uyghurs and other ethnic minorities.
Another possibility is forced delisting of Chinese companies in the U.S. that are not compliant with the Sarbanes-Oxley Act that requires third-party financial audits.
CPA put out a statement in favor of Biden’s EO late Thursday.
“We are pleased that the Biden administration has left the majority of these sanctions in place and strengthened them in some areas,” CPA’s chief executive Michael Stumo said. He warned that the “historically close relationship between Wall Street and the Treasury Department” requires watching. We do not want to see this watered down because BlackRock doesn’t want to sell. There are plenty of other stocks and bonds for them to choose from, including those in China that are not sanctioned. And for this reason, we believe those 59 companies will be starved of U.S. capital starting in August.
What the Biden update does:
- Keeps the Trump EO effect in place even as it technically replaces it. There is now bipartisan support for the first-ever capital market sanctions against Chinese companies.
- Keeps the Trump EO to cover bonds, including two funds used to raise money for Huawei.
- Expands the Trump EO to cover not just military-related companies but surveillance-related companies.
- Divestment deadlines are reasonable with two months after naming the companies for freely trading stocks, then another 10 months to divest.