Index providers will likely be forced to remove companies like China Mobile and China Telecom from key benchmarks by 11 January.
The Trump administration has issued an executive order prohibiting US persons from purchasing securities of companies identified as being owned or controlled by China’s military.
“China is increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses,” the order says. “The PRC increases the size of the country’s military-industrial complex by compelling civilian Chinese companies to support its military and intelligence activities.”
“Those companies raise capital by selling securities to United States investors that trade on public exchanges both here and abroad, lobbying United States index providers and funds to include these securities in market offerings, and engaging in other acts to ensure access to United States capital. In that way, the PRC exploits United States investors to finance the development and modernization of its military.”
The order effectively declares a national emergency with respect to China’s “military-industrial complex”, which is said to threaten the national security, foreign policy, and economy of the US.
According to Reuters, the move is designed to deter US investment firms, pension funds and others from buying shares of 31 Chinese companies that were designated by the Defense Department as backed by the Chinese military earlier this year.
From 11 January, US investors will be prohibited from purchasing the securities of those companies, which include the US-listed stocks of Chinese state-owned companies China Mobile and China Telecom.
Both stocks are index members of most key benchmarks that include China constituents. Index providers such as MSCI and FTSE Russell will likely be forced to remove the companies from their indices.
Transactions made to divest ownership in the companies will be permitted until 11 November 2021.
The order does not set out specific penalties for violations, but authorises the Treasury Department to invoke “all powers” granted by the IEEPA (International Emergency Economic Powers Act), which includes the use of tough sanctions.
It is unclear whether President-elect Joe Biden plans to enforce the order when he takes office on 20 January.