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Trump rules on China investment spark confusion across global finance

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Brokers and other financial groups from New York to Hong Kong have been left scrambling to comply with a US presidential ban on investment in companies with alleged ties to the Chinese military.

Donald Trump’s executive order, which comes into effect on January 11, days before he leaves the White House, has flummoxed financial institutions, leaving the New York Stock Exchange banning a handful of Chinese companies, reinstating them days later, and on Wednesday banning them again under pressure from the Trump administration. On Thursday, concerns over how the blacklist will apply hit shares in US-listed Asian tech stalwarts Alibaba and Tencent.

Lawyers and financial executives say the ambiguously worded rules and guidance over how they will be enforced have sown confusion over how to avoid legal and financial penalties.

“The average financial institution is worried, ‘Am I going to be in trouble on Tuesday?’” said Paul Marquardt, a partner at law firm Cleary Gottlieb. “NYSE is a symptom, it is not the issue. The issue is really getting greater clarity on how far the new sanctions go.”

The hastily assembled five-page executive order signed by Mr Trump last November banned the purchase of shares in 31 Chinese companies believed to be tied to the People’s Liberation Army, including businesses like China Mobile and Huawei. However the order did not specify whether it also affected subsidiaries and affiliates of those companies — a group that includes the US shares of the three Chinese telecommunications companies NYSE has said it will delist.

Line chart of Performance since November 11, 2020 (%) showing Chinese telecoms have tumbled since Trump signed executive order

The Treasury had been slow to offer guidance on the order, but on December 28 it said subsidiaries would be included 60 days after it published a detailed list, which it has not yet done. In the absence of a list, NYSE reversed its decision to remove several companies on Monday.

That drew recriminations from anti-China hawks in the Republican party and prompted an intervention from the Treasury. The Office of Foreign Assets Control (Ofac), which oversees US sanctions guidance and enforcement, has since said that buying shares with similar names to the 31 businesses named in Mr Trump’s executive order would be banned. But that too has created a problem for investors who must now judge how close the names of securities they own are to the list provided by the White House.

Scott Flicker, a partner at Paul Hastings, warned of a likely “whole additional category of securities floating out there that might have a similar name” to one on the executive order list. He said that left the investing public in “a nether land”.

Index providers including MSCI, FTSE Russell, S&P Dow Jones Indices and Nasdaq have said they plan to drop Chinese companies from their benchmarks. However, each has interpreted the guidance from Treasury differently. “It was a bit of a mess,” an executive at one of the providers said.

The London Stock Exchange removed two securities, American depositary receipts of China Mobile and China Unicom, from its global equity segment on Monday. That happened after the NYSE had delisted the companies, since the ADRs were backed by shares listed in New York.

NYSE’s backtrack threw the decision into doubt, prompting fresh discussions among LSE officials. But the securities are expected to remain off the LSE, following the NYSE’s second about-turn and on the expectation that the securities will be on the as-yet unpublished subsidies list.

Some brokers who process and settle trades have warned clients that they would be unable to transact any securities linked to the 31 groups, one emerging markets investor told the Financial Times, requesting anonymity for fear of retribution from regulators. Late on Wednesday, Ofac said financial intermediaries could facilitate trades if an investor was seeking to sell out of an affected Chinese group.

“People have a hard time understanding exactly where the lines are [and] what they can and cannot do,” said Maura Rezendes, a partner at Allen & Overy who previously worked at Ofac. “Even with the cover of [further guidance] or the US government saying we didn’t mean to prohibit those kinds of activities, you’ll just see people refuse to do it. That will cause gridlock in the market.”

Money managers said the mandate could prompt other Chinese companies to de-list from American exchanges. Since 2000, Chinese companies have raised more than $140bn through share sales on US shores, according to data provider Refinitiv. It is unclear whether president-elect Joe Biden will reverse the policies Mr Trump’s team has enacted in its final days in office.

Column chart of Proceeds from equity offerings by Chinese groups in the US, by year ($bn) showing Chinese companies have raised north of $140bn in the US since 2000

“This is a rivalry that is likely to be with us regardless of the change in the US administration,” said Morgan Harting, a portfolio manager at AllianceBernstein. “The specific policy choices or tactics will surely evolve . . . but I wouldn’t expect there to suddenly be much warmer relations.”

The executive order has already prompted mutual and exchange traded funds to cut stakes in Chinese groups and for investors to analyse what derivatives in their portfolio might prove problematic. US shares of China Mobile and China Telecom have fallen nearly 20 per cent since Mr Trump signed the order.

“You are essentially weaponising the financial markets,” Jack Janasiewicz, a portfolio manager at Natixis Investment Managers, warned.

Additional reporting by Hudson Lockett, Michael Mackenzie



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How Jennifer Granholm will reshape the US Department of Energy

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Two things to start: ExxonMobil appointed two new directors to its board, its latest effort to placate activist shareholders. And Texas’s largest power co-op Brazos Electric went bust yesterday, as the financial damage from the arctic storm continues to mount.

Oh, and after the hiatus caused by the pandemic, energy-related emissions are rising again, according to the International Energy Agency. They were higher in December than a year previously, the agency said.

Welcome to another Energy Source. Our main item today is on Jennifer Granholm, whom the US Senate last week confirmed as the country’s new energy secretary. Myles McCormick reports on her plan to revitalise her department and reorient it towards clean energy.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

Granholm looks to reboot the Department of Energy

From scuppering the Keystone XL pipeline to freezing the allocation of new drilling leases on public lands, Joe Biden’s plans to shake up the American energy system are well under way.

Next on the president’s agenda is an overhaul of the sprawling leviathan that is the US Department of Energy. And the woman that will lead that process is now in situ.

Jennifer Granholm, a former two-term governor of Michigan, took the reins of the $35bn a year government agency five days ago. And already it is clear there will be a shift in its focus — away from promoting fossil fuel exports and towards driving innovation in clean energy and climate technology.

This is what Granholm wrote in a blog post last Thursday, her first day on the job:

“President Biden has tasked the Department, his in-house solutions powerhouse, with delivering a cornerstone of his bold plan: the goal of achieving net-zero carbon emissions by 2050. For DoE, that means developing and deploying the technologies that will deliver a clean energy revolution.”

That will require a shift in priorities at the “in-house solutions powerhouse” — but one that analysts said Granholm was well suited to execute.

“She understands the economic benefits of transforming the agency into the Department of Clean Energy,” said Mitch Bernard, president of the Natural Resources Defense Council.

Jennifer Granholm was sworn in as energy secretary on February 25 © Getty Images

What can the DoE actually do on climate?

American energy policy is divvied up among several government agencies, of which the Department of Energy is just one. Traditionally its primary responsibilities have been the US nuclear weapons programme, environmental clean-ups and scientific research and development through its oversight of the country’s national laboratories.

Despite the department’s name, Granholm’s ability to effect the Biden climate agenda is constrained. She does not have oversight of emissions targets (which fall to the Environmental Protection Agency) or oil and gas drilling licences (the Department of the Interior).

“I do think the DoE’s ability to advance climate goals is fairly limited,” Nader Sobhani, climate policy associate at the Niskanen Center, told ES.

But what it can do is reinvigorate the department’s R&D role.

“I think there will certainly be a shift in the programmatic focus of this DoE as compared to the previous administration, in that there will be a concerted effort to innovate, develop and deploy clean energy technologies that are critical to combating climate change,” said Sobhani.

That means driving forward research on carbon capture and storage, electric vehicle charging infrastructure, energy storage technology and zero-carbon fuels such as green hydrogen.

How will it set about doing this? The department has a few tools in its toolkit:

  • There are the 17 national laboratories, which are hotbeds for tech breakthroughs.

  • There are grant and loan programmes it can use to drive innovation and de-risk new technologies to coax in private sector investment. Granholm has already indicated she will restart a $40bn loan programme that was left untouched by the Trump administration.

  • Plus, it has regulatory authority to encourage energy efficiency in certain appliances and new transmission lines.

But all of this will require funding. While Congress ensured the agency was not financially gutted by the last administration, ramping up its R&D role will require more money. Biden has pledged $400bn over the next ten years for clean energy and innovation.

Granholm’s record on spending big — sometimes without the desired effect — has already sparked criticism from some quarters, with conservatives arguing her selection “should frighten every American taxpayer”.

Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco
Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco © Bloomberg

New leadership

Just as important as finance will be the shift in tone Granholm will bring.

While money kept flowing under the Trump administration, the agency lacked the strategic drive needed for clean tech innovation, said Emily Reichert, chief executive of Greentown Labs, North America’s biggest start-up incubator.

“When people look back on it, it was an absence of leadership — on innovation, on policy, on decisions, on strategy — that we needed to move forward faster,” she told ES.

The DoE’s role in convening experts from across the US has been central to driving the development of new technology. But as a divided country shifts rapidly towards a new approach to energy, that outreach role will be even more important.

That makes the appointment of Granholm key. A Michigan native, with years of experience dealing with the Detroit auto industry, she will be able to bring the climate change narrative to parts of the country that coastal liberals have often failed to reach.

“I think that Jennifer Granholm coming from a Midwestern perspective is a real game changer in terms of bringing the focus of this activity to the middle of the country, and recognising that the middle of the country can also get engaged in this developing the innovations around climate,” said Reichert.

But most importantly — four years after Donald Trump appointed an energy secretary who thought the department should be scrapped — Granholm’s championing of clean energy should get investors excited to spark the influx of funds needed for the “clean energy revolution” her boss has promised.

“The market signal it sends is that, one, the US is back in the game,” said Reichert. “And two, that climate related technology solutions around decarbonisation are a good place to invest your money, your time, your talents, and to move your assets.”

(Myles McCormick)

Data Drill

The energy transition could lower oil prices in the long term by $10 a barrel — by far the biggest threat to the net present value of oil companies, according to new research from Rystad Energy that assessed the resilience of 25 large operators. The consultancy quantified the risk to NPVs of stranded assets as less than 1 per cent, and that from rising CO2 costs at mostly below 10 per cent.

Oil sands and tight oil companies are most exposed to price risk because of high break-even costs. Oil sands would suffer most from higher CO2 costs. And ExxonMobil’s revenue risk is higher than its supermajor peers’, “primarily because its portfolio includes several large, capital-intensive projects”, including the Permian Basin assets and Guyanese shale.

Bar chart of Impact on net present value (%) showing The energy transition's corporate hit, quantified

Power Points

FT Energy Source Live

The FT Energy Source Live event will be taking place on 24 — 25 May 2021. Join industry CEOs, thought leaders, energy innovators, policymakers, investors and other key influencers to hear the latest thinking and insights on the future of US energy leadership and its global context. Find out more here.

Endnote

IHSMarkit’s CERAWeek, cancelled by the pandemic last year, is back on — and it has a new look.

Keynote speeches and panel discussions have moved from the Hilton’s plush ballrooms in downtown Houston to a slick new web interface. Many have been pre-recorded. Deals that came together in the hotel’s executive suites will have to wait. Journalists are missing the free lunches.

Still, the conference’s agenda boasts a who’s who of the energy industry, and increasingly beyond, as the sector grapples with the low-carbon energy transition — a topic that was scarcely mentioned just a couple years ago.

Andy Jassy, the head of Amazon’s cloud business, who has been picked to succeed Jeff Bezos as the company’s CEO later this year, had some advice that cut to the heart of the dilemma facing oil executives.

“If you want to be a company for a long period of time — which by the way turns out to be really hard to do — you have to be able to reinvent yourself, sometimes several times over,” said Jassy in a session with BP’s Bernard Looney, who pitched his company’s own transition away from oil.

“If something is going to happen, whether it’s good for you or not, if it is good for customers it is going to happen,” added Jassy. “So you have a couple of choices: you can howl at the wind and wish it away as a lot of companies do — big leading companies do — when there are new shifts technology, or you can embrace it.”

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.



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Hedge fund manager Hohn pays himself $479m

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Billionaire hedge fund manager Sir Christopher Hohn has paid himself a dividend of $479m, one of the largest-ever annual personal payouts in the UK, after profits at his firm more than doubled last year.

Hohn, who is founder of Mayfair-based TCI Fund Management and one of the UK’s biggest philanthropists, made the payment to a company he controls during the year to February 2020, according to regulatory filings.

TCI, which manages more than $45bn in assets and tends to bet on rising rather than falling prices, has been a big winner from the bull market of recent years. During 2019 it made $8.4bn worth of profits for investors, according to LCH Investments, profiting from gains in stocks including Alphabet, Charter Communications and Canadian Pacific Railway.

TCI Fund Management’s profits for the year to February 2020 jumped 108 per cent to $670.9m. The $479m dividend was then paid to a separate firm TCI Fund Management (UK). Both companies are controlled by Hohn.

TCI declined to comment. The payment was first reported by The Guardian.

While the payout beats the £323m paid to Bet365 boss Denise Coates in 2018, much of it has been reinvested in TCI funds, filings show. It is also far from the biggest-ever hedge fund payday, being dwarfed by sums such as the $3.7bn earned by US manager John Paulson in 2007 thanks to bets on the subprime crisis.

In 2014, during testimony in his divorce battle with estranged wife Jamie Cooper-Hohn, Hohn described himself as “an unbelievable moneymaker”. A High Court judge later awarded Cooper-Hohn a $530m divorce payout.

Hohn, who grew up in Surrey and is the son of a Jamaican car mechanic, is known as one of Europe’s most aggressive activist investors. A backer of climate group Extinction Rebellion, he has been vocal in recent years in pushing companies to improve their climate policy, for instance threatening to sue coal-financing banks and warning his fund will vote against directors whose companies do not improve pollution disclosure.

In October Spanish airports operator Aena bowed to pressure from Hohn’s fund, becoming the first company in the world to give shareholders an annual vote on its climate policy.

Through his charity The Children’s Investment Fund Foundation, which in 2019 approved $386m of charitable payouts, he wrote to seven of the world’s biggest asset managers, urging them to put pressure on companies over climate policy.

Last year TCI was one of a number of funds looking to raise fresh assets from investors after suffering losses during the pandemic. It was also one of the big winners from betting against collapsed German payments group Wirecard, making as much as €193m in a week, according to data group Breakout Point.

Hohn’s fortune was estimated last year at £1.3bn by the Sunday Times Rich List.

laurence.fletcher@ft.com



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