The threat of US $ 1 trillion sanctions against Chinese internet giants that drove emerging market stocks to their first record since 2007 overshadows the rally, as increased control over Beijing itself slashes valuations.
US-China tensions have intensified in recent days as the outgoing administration of US President Donald Trump has imposed a ban on Americans investing in 35 companies it considers linked to the Chinese military.
Sources in Washington said last week that Trump was considering adding Alibaba and Tencent, worth a combined $ 1.3 trillion, the second and third largest emerging market stocks in the world and held by almost every large American investment funds, on the list of prohibited companies.
Targeting China’s two most valuable companies would be the most dramatic step yet against the country’s businesses as Trump seeks to consolidate his tough policies against Beijing in his last days in office.
Goldman Sachs estimates that U.S. investors own around $ 1 trillion in Chinese internet and tech stocks, or have U.S. listings known as American Depositary Receipts (ADRs) that Washington has also cracked down on.
“To unwind a trillion investments [if Alibaba and Tencent were removed] is a lot! ”said Vivian Lin Thurston, portfolio manager and Chinese equity analyst at William Blair Investment Management.
“It would be unprecedented,” she added. “This has never happened in any world market.”
Swiss bank UBS estimates that just over a third of Alibaba’s $ 616 billion market capitalization is held by U.S. investors, compared to 12 percent of Tencent’s $ 35 billion value.
The two companies also account for nearly 11% of the $ 7 trillion MSCI Emerging Markets Index, which they joined in 2015 and 2008 respectively. Chinese companies now account for 40% of the index, up from 17% there. is only ten years old.
The big relax
Global index providers such as MSCI, S&P Dow Jones and FTSE Russell as well as the New York Stock Exchange have been forced to exclude from their main benchmarks top companies from Trump’s list like China Mobile , China Telecom and the semiconductor giant SMIC.
William Blair’s Lin Thurston discussed how these deletions then trigger a wave of selling by investment funds that passively track indexes.
“As soon as it is taken off the list – bang it’s gone,” she said, referring to the need to get rid of stocks.
While new US President Joe Biden may overturn the ban, UBS analysts say the new administration may not want to appear “gentle” on China.
Neither Biden nor his team have commented on the matter, but a reversal still wouldn’t undo the billions of dollars in disruption already caused.
Chinese investors have rushed to buy some of the unloaded stocks, but could struggle to absorb everything if the situation snowballs.
Goldman Sachs estimates that there would be a massive sell-off of $ 28 billion if all international funds that track MSCI’s major global, emerging or Asian indices were to liquidate the holdings of 42 Chinese companies it considers at risk, without count Tencent or Alibaba.
Goldman Sachs and fellow Wall Street banks JPMorgan and Morgan Stanley also announced that they would withdraw up to 500 Hong Kong-listed structured products they had issued in connection with Chinese companies.
The Trump administration has both Tencent and Alibaba’s financial technology affiliate, Ant Group, in its sights for some time.
Last week, Trump signed an executive order banning US transactions with Alibaba’s Alibaba mobile payment app and Tencent’s WeChat and QQ Wallet on the grounds that they could be used to “track federal employee locations” and ” create personal information files ”.
China’s Foreign Ministry responded by saying that the United States was abusing its power and unreasonably suppressing foreign companies with these measures.
Tencent and Alibaba declined to comment.
In early November, it was Beijing itself that shook investors after the surprise suspension of the $ 37 billion public listing of Ant Group, which is expected to be the largest IPO in the world, a few days before the end.
Alibaba, which owns around a third of Ant, has seen its market value decline by more than a quarter since the initial public offering was suspended and regulators focused on its business model, although it is still listed. among the 10 largest companies in the world with a rating. over $ 600 billion.
Some fund managers felt Beijing’s move was reasonable because Ant, a major online lender, lacked adequate capital buffers. But others – including Alistair Way, head of global emerging markets equities at Aviva Investors – are affected.
“We have become a little more nervous about the regulatory climate in China and the apparent desire to reduce the competitive dominance of big e-commerce players such as Alibaba,” he said.
“Overall, we have reduced our exposure to Chinese internet companies.”
Senior at Aberdeen Standard Investments INick Robinson, chief investment officer, is also uncertain.
“It seems unlikely at the moment that they [Alibaba and Tencent] will be added to the blacklist, but so far it has not been fair to bet on a de-escalation. “
“So could this happen?” Absolutely. And if that happens, it could be pretty big. “