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Index providers react to Donald Trump’s Chinese investment bans

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President Donald Trump’s move to curb US investment in securities of Chinese companies with links to the military has put pressure on both global index providers and exchange traded fund providers who are scrambling to decide on their response within the tight deadline.

Mr Trump signed the order in mid-November prohibiting “US persons” from “transactions” in securities of 31 Chinese companies that the Department of Defense identified as “Communist Chinese military companies”. The order takes effect on January 11, 2021.

As fund companies in Asia seek legal advice about responding to the ban, most major global benchmark providers have rushed to consult with asset managers and clients, as well as with other index users, on whether to drop the relevant securities of the sanctioned companies.

“The executive order set off a fire drill among many benchmark providers,” according to a Morningstar research report issued last week.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Index and ETF providers have been given a “very short period of time” to communicate with each other on how to respond, said Jackie Choy, Morningstar’s Hong Kong-based director of ETF research for Asia.

At least four major global benchmark providers have rolled out consultations on whether they should eliminate the blacklisted Chinese groups from their indices.

S&P Dow Jones Indices is the latest to announce exclusions from major indices as a result of the consultation.

 FTSE Russell said last Friday that it would remove companies named by the US government from some of its indices on December 21, including China Railway Construction Corporation, China Communications Construction Company and Hikvision.

For indexing firms that have established rules for dealing with sanctions applied in different global markets, it has been somewhat easier to proceed.

For instance, the FTSE cited a clause of its own policies that should sanctions, either primary or secondary, be imposed that prohibit US, UK or European Union natural or legal persons from investing in particular countries, industries, named companies or companies linked to sanctioned individuals, it would delete the sanctioned securities from the FTSE Russell indices.

Both US index provider MSCI and S&P Dow Jones have concluded consultations with their index users.

These pre-announcement consultations are “crucial” to asset managers and institutions, as they will have to decide which side they are on regarding the exclusions, said a Hong Kong-based senior executive with a global manager, running a sizeable ETF business.

“I’d say it’s mostly a business decision rather than a compliance decision for index providers,” the executive said. “Benchmark providers want to keep their users happy but if most of the end investors are from the US, the only way is to get rid of the companies because they are not investible to them.”

Rebecca Chua, Hong Kong-based founder and chief executive of ETF provider Premia Partners, said that although her company had very little exposure to the blacklisted companies, she and her team had been in regular discussions with her index provider China Securities Index about the order.

Ms Chua said both parties agreed that it would be better for ETF providers to take a more prudent approach, and at least wait and see whether this executive order would remain in place.

“US-China tensions evolve every day, and could become quite different under the new administration. We just have to keep on monitoring what is going on,” she said.

China Mobile and China Telecom are among the largest companies by market capitalisation on the new US blacklist. Both are constituents of many prominent indices with Chinese equities exposure, according to a research note from Morningstar.

China Mobile and China Telecom had respective weightings of 0.57 per cent and 0.06 per cent in the MSCI Emerging Markets Index, and 1.33 per cent and 0.15 per cent in the MSCI China Index at the end of October.

JPMorgan notified its clients on November 17 that it would exclude new debt issuance from the sanctioned companies from its indices, according to a note seen by Ignites Asia.

JPMorgan Asia Credit Index, its Asia-credit focused benchmark, “is expected to be the most impacted”, the note read.

The JPMorgan suite of emerging market indices currently includes 72 fixed-credit securities issued by 16 sanctioned Chinese companies.

The Hong Kong-based senior executive said that ETF managers were also trying to determine which organisations would be responsible for identifying “US persons” and whether a US manager’s Hong Kong-domiciled ETFs would be included in the order.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.



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Emerging Markets

NYSE to suspend trading of China’s Cnooc next month

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The New York Stock Exchange is to start delisting proceedings against China National Offshore Oil Corporation to comply with an executive order from Donald Trump that bans Americans from investing in companies with ties to the Chinese military.

The NYSE on Friday said it would suspend trading in Cnooc’s American depository shares on March 9, after determining that the company was “no longer suitable for listing” following the order that the former US president signed in November.

The order banned investing in several dozen Chinese groups that were last year put on a Pentagon blacklist of companies that are accused of working with the People’s Liberation Army and threatening US security. Trump set a January 28 deadline for the ban to take effect, but President Joe Biden pushed the deadline back to May 27.

The NYSE move comes as Biden evaluates a number of assertive actions that Trump took against China during his last year in office. The commerce department last year put Cnooc on a separate blacklist — called the “entity list” — that makes it hard for US companies to sell products and technology to the Chinese oil group.

The Biden administration has not made clear whether it intends to keep Trump’s executive order in place. But the new president and his officials have so far adopted a tough stance towards China over everything from its economic “coercion” to concerns about its clampdown on the pro-democracy movement in Hong Kong to the repression of more than 1m Uighur Muslims in the northwestern Chinese province of Xinjiang.

Earlier this month, Biden used his first conversation with Chinese president Xi Jinping since assuming office to raise concerns about Hong Kong and Xinjiang, and aggressive Chinese actions towards Taiwan. Antony Blinken, secretary of state, also described the detention of Uighurs in labour camps as “genocide”.

Jen Psaki, White House press secretary, has said the administration was conducting a number of “complex reviews” of the China actions that Trump took. The former president put dozens of other Chinese companies on the Pentagon and commerce department blacklists, including Huawei, the Chinese telecoms equipment group.



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Bond sell-off roils markets, ex-Petrobras chief hits back, Ghana’s first Covax vaccines

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The yield on the benchmark 10-year Treasury exceeded 1.5 per cent for the first time in a year and the outgoing head of Petrobras warns Brazil’s President Jair Bolsonaro against state controlled fuel prices. Plus, the FT’s Africa editor, David Pilling, discusses the Covax vaccine rollout in low-income countries. 

Wall Street stocks sell off as government bond rout accelerates

https://www.ft.com/content/ea46ee81-89a2-4f23-aeff-2a099c02432c

Ousted Petrobras chief hits back at Bolsonaro 

https://www.ft.com/content/1cd6c9fb-3201-4815-9f4f-61a4f0881856?

Africa will pay more for Russian Covid vaccine than ‘western’ jabs

https://www.ft.com/content/ffe40c7d-c418-4a93-a202-5ee996434de7


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Petrobras/Bolsonaro: bossa boots | Financial Times

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“Brazil is not for beginners.” Composer Tom Jobim’s remark about his homeland stands as a warning to gung-ho foreign investors. Shares in Petrobras have fallen almost a fifth since President Jair Bolsonaro said he would replace the widely respected chief executive of the oil giant.

Firebrand Bolsonaro campaigned on a free-market platform. Now he is reverting to the interventionism of leftist predecessors. It is the latest reminder that a country with huge potential has big political and social problems.

Bolsonaro reacted to fuel protests by pushing for a retired army general to supplant chief executive Roberto Castello Branco, who had refused to lower prices. This is politically advantageous but economically short-sighted.

Fourth-quarter ebitda beat expectations at R$60bn (US$11bn), announced late on Wednesday, a 47 per cent increase on the previous quarter. This partly reflected the reversal of a R$13bn charge for healthcare costs. Investors now have to factor the cost of possible fuel subsidies into forecasts. The last time Petrobras was leaned on, it set the company back about R$60bn (US$24bn at the time). That equates to 40 per cent of forecast ebitda for 2021.

At just over 8 times forward earnings, shares trade at a sharp discount to global peers. Forcing Petrobras to cut fuel prices will make sales of underperforming assets harder to pull off and debt reduction less certain. Bidders may fear the obligation to cap prices will apply to them too.

A booming local stock market, rock bottom interest rates and low levels of foreign debt are giving Bolsonaro scope to spend his way out of the Covid-19 crisis. But the economy remains precarious. Public debt stands at 90 per cent of gross domestic product. The real — at R$5.40 per US dollar — remains near record lows. Brazil’s credit is rated junk by big agencies.

Rising developed market yields will make financings costlier for developing nations such as Brazil. So will high-handed treatment of minority investors. It sends a dire signal when a government with an economic stake of just over a third uses its voting majority to deliver a boardroom coup.

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