Order passed in November blocks US investors from buying securities of Chinese firms allegedly under military control.
MSCI Inc. will remove China’s three major telecommunications companies from its indexes on Friday, giving global funds just one day to adjust billions of dollars of passive investments.
The index provider’s decision to cut China Mobile Ltd., China Telecom Corp. and China Unicom Hong Kong Ltd. at the close of business applies to their shares in Hong Kong, which are far more actively traded than the securities due to be delisted by the New York Stock Exchange. The rush to rebalance lifted volume in all three stocks to at least seven times the daily average over the past three months.
The deletions add fresh selling pressure to stocks that have swung wildly this week on confusion over whether they should be included in a U.S. ban on investments in Chinese companies with military ties. Passive investors, market makers and portfolio traders usually have weeks to prepare for significant index changes, which can be the busiest days of the quarter. One Hong Kong trader at a New York-based bank said client demand was so overwhelming on Friday that employees from other teams were pulled in to help.
Shares of China Unicom sank as much as 11% in Hong Kong on Friday, while China Mobile and China Telecom dropped around 10%. China Mobile was the most actively-traded stock in Hong Kong, with about $2.3 billion changing hands in the morning session — the second-highest on record.
“Obviously it’s negative — investors got very short notice to prepare for the deletions,” said Kenny Wen, wealth-management strategist at Everbright Sun Hung Kai Co Ltd. “The reversals of these decisions has created a lot of headache and confusion.”
There was more than $1 trillion invested in equity exchange-traded funds tracking MSCI indexes in November, according to the company. Global active money managers also use MSCI indexes to benchmark their positions, with some $12 trillion linked to MSCI gauges. About 40% of its index subscribers were based in the Americas, MSCI said in a recent presentation.
S&P Dow Jones Indices also said it will remove the three telecom companies effective Monday, after earlier canceling plans to do so in a series of flip-flops that mirrored those at NYSE. For its part, FTSE Russell is removing China Mobile and China Telecom from its FTSE China 50 Index.
The drama has confounded investors since Donald Trump issued an executive order in November barring investments in companies deemed by the U.S. to be owned or controlled by China’s military. The ambiguously worded order was part of Trump’s effort to punish China in the waning days of his presidency. His administration has sought to sever economic links and deny Chinese firms access to American capital, especially those judged to pose a threat to U.S. national security.
The three telcos said on Thursday that they have complied with all rules since their listing in the U.S. and they will seek professional advice to protect their “lawful rights” or “legitimate interests.” They all advised investors to exercise caution when dealing in their securities.
China Mobile is among the largest stocks in the MSCI China Index, with a weighting of about 1.1%, data compiled by Bloomberg show. The company’s New York-listed shares fell 6% at the close on Thursday, sliding a further 3.4% in extended trading after MSCI’s announcement.
Bloomberg LP, the parent of Bloomberg News, also compiles stock and bond indexes.
One question still hanging over the market is whether China seize on the moves by MSCI, NYSE and others to retaliate. Some analysts have speculated Beijing may hold fire until after authorities get a better feel for how America’s policies on China will evolve after Joe Biden enters the White House later this month.
Also unclear is whether large investment firms such as BlackRock Inc. and Vanguard Group will adjust their product offerings to accommodate international funds that still want exposure to stocks affected by the U.S. ban. The firms, along with many others on Wall Street, have been ramping up their businesses in China after the country relaxed restrictions on foreign financial companies last year.
Investors are also watching closely whether the U.S. will expand its restrictions to cover other blue-chip Chinese companies. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. led a selloff in tech stocks on Thursday after reports that the Trump administration is considering adding them to its list of banned companies. The two companies have a combined market value of $1.3 trillion.