The U.S. continues to restrict the ability of Chinese companies with Communist Party military background to raise funds in the U.S. market, and index providers such as FTSE Russell and S&P Dow Jones have also matched the policy by removing several Chinese companies, including SMIC, from the index one after another.
In this regard, scholars said that this will drive global funds and ETFs to sell shares of Chinese companies, while the credit rating of these Chinese companies will also be reduced, making it difficult to obtain funds in the international financial market in the future, “Professional investors will sell shares of Chinese companies in large numbers, and this impact is quite significant.”
The U.S. government announced last year that since January 11 this year, U.S. companies and individuals are prohibited from investing in 35 companies with a communist background, and the New York Stock Exchange (NYSE), in line with this policy, announced that on January 11, China Mobile, China Telecom and China Unicom and other three major Chinese telecommunications, their ADRs were removed from the index.
Another focus of investors’ attention is that index providers such as FTSE Russell, S&P Dow Jones, and Nasdaq have also been removing Chinese companies with communist backgrounds from their indices.
Watch out for the actions of global index provider FTSE Russell, which announced on January 4 that it has removed SMIC from the FTSE China 50 Index and Hangzhou Hikvision from the FTSE China A50 Index since January 7; S&P Dow Jones has removed at least 21 Chinese companies, including Hikvision and SMIC, from the index.
Investors will continue to sell their shares in Chinese companies
FTSE Russell and other indices affect the layout of global funds, ETF direction, said Zhang DingXuan, associate professor of finance and finance at King’s College of Liberal Arts, index funds, for example, assuming that performance wants to win over the broader market, more will be synchronized with the broader index, follow the broader index to invest. He cited the example of the broad market has 10% of TSMC, the relevant funds will follow to buy 10% of TSMC, “so that the underlying performance of the broad market can be replicated.”
“The Chinese companies are removed from the index, which means that the funds that refer to these indices will no longer hold the constituent stocks of these Chinese companies.” Zhang DingXuan said, “Investors will continue to sell off shares of Chinese companies, creating considerable selling pressure for these Chinese companies.”
Zhang DingXuan described, “It’s like going from mandatory to optional, which will be dumped by the broader market, and many funds will not have SMIC in their basic holdings.”
“The impact of this is very big.” Zhang DingXuan said, was removed from the index of Chinese enterprises, its credit rating will be affected by the chain, especially in the issuance of bonds, will not be able to attract bond funds into the field, and the cost of issuance in the international financial market will become higher, “in short, this is quite unfavorable to Chinese enterprises to raise capital, will become a heavier burden for them.”
“Professional investors will absolutely start selling off a lot of shares in these Chinese companies.” Will these Chinese companies survive? According to Zhang DingXuan, “It depends on whether these Chinese companies can get funding in the Chinese market.”
The Chinese Communist Party is not able to fully bail out Chinese companies
He believes that even if the Chinese Communist Party had the ability, it would not be able to fully bail out these Chinese companies. “In the past, these companies were backed by the state, and the Chinese Communist Party would even ask government agencies to buy their shares, but this time, it has to deal with a large number of Chinese companies that were removed from the index in a short period of time, and the Chinese Communist Party is bound to be overwhelmed.”
Yin Nai-ping, an adjunct professor of finance at National Chengchi University, believes that “global funds will invest less in China and change the shareholding structure of Chinese companies, and the proportion of foreign investment will inevitably be reduced.” He said that Chinese companies are locked into the Chinese market and have a state-run background. Although the source of funds has been changed, it remains to be seen whether it will have an unrecoverable impact on the companies themselves.
Some of Taiwan‘s ETFs and funds have a Chinese enterprise component, whether to follow the FTSE Russell and other stock indices to exclude Chinese enterprises with PLA background, Yin Nai-ping believes that this involves Taiwan’s domestic policy, “If Taiwan’s policy follows the direction of the United States, then these ETFs must exclude Chinese capital.”
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