MSCI said it would drop three of China‘s biggest telecommunications companies from several of its global equity benchmark indices on Friday in response to a US executive order restricting ownership of companies with purported ties to the Chinese military.
The index compiler said it would drop the Hong Kong-traded shares of China Mobile, China Telecom and China Unicom from its family of MSCI ACWI indices and MSCI China All Shares indices at the close of business on Friday, following further guidance from the Office of Foreign Assets Control (OFAC), an arm of the US Treasury Department.
S&P Dow Jones Indices said on January 6 it would remove the telecoms trio before the start of trading on Monday. FTSE Russell will also do the same to some of its stock, bond and other associated indexes on Monday.
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The announcement came after the New York Stock Exchange (NYSE) said it would delist the American depositary shares (ADS) of the three Chinese telecoms beginning Monday. The NYSE originally announced on January 1 it would delist their shares, but reversed course several times this week until it received updated guidance from OFAC.
Last November, President Donald Trump signed an executive order that barred American investors, including pension funds and university endowments, from owning or trading securities of 35 companies and dozens of subsidiaries that the Trump administration claims are controlled by Chinese military.
The ban on US persons kicks in from Monday and they have until November 11 to divest their holdings of similarly designated companies but cannot buy new shares starting Monday.
The order is one among a flurry of moves taken in the waning days of the Trump administration against Chinese companies, including moves to limit their access to US capital markets.
The Chinese telecoms stocks represented 0.07 per cent of the MSCI ACWI indices, 0.50 per cent of the MSCI Emerging Markets indices and 0.81 per cent of the MSCI China All Shares indices as of January 6, MSCI said.
MSCI previously said it would drop 10 Chinese companies from its indices after they were blacklisted by the US government, including surveillance camera maker Hangzhou Hikvision and Semiconductor Manufacturing International Corporation (SMIC) and supercomputer manufacturer Dawning Information, which is also known as Sugon.
Other major stock and bond index providers, including FTSE Russell and S&P Dow Jones Indices, have taken similar steps beginning in December to drop designated Chinese stocks from their global benchmarks.
In this week’s announcements, S&P Dow Jones Indices said it would remove the telecoms trio from 113 headline equity indices, and five bonds from four indices, the start of trading on Monday. FTSE Russell will also do the same to some of its stock and other associated indexes.
“The companies facing immediate removal from the NYSE likely aren’t a major part of most US-based investors’ portfolios but may present issues on the margin,” said Katie Rushkewicz Reichart, Morningstar’s director of US equity strategies.
Actively managed funds in the US with Morningstar ratings held about US$1.3 billion worth of securities facing blacklisting as of their most recently disclosed portfolios, Rushkewicz Reichart said in a research note on Friday.
The biggest effect may be on 15 actively managed funds rated by Morningstar who held nearly US$700 million of China Mobile’s H shares or ADSs per their most recent disclosures, she said.
Shares of China Mobile fell as much as 9.9 per cent in intraday trading in Hong Kong on Friday, while shares of China Telecom dropped as much as 10.3 per cent and China Unicom (Hong Kong)’s shares were off as much as 11.2 per cent.
The ADSs of the telecoms companies traded in New York are fungible with their H-shares in Hong Kong, which means they can be exchanged for their counterparts ahead of the NYSE delisting. Each China Telecom ADS is equal to 100 shares in Hong Kong, while Unicom’s ratio is 1 for 10, and China Mobile’s ratio is 1 for 5.
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