Impact of the U.S. Ban on Named Chinese Securities
On January 11, 2021, the Executive Order 13959 (“E.O.”) issued by Donald Trump designed to protect U.S. investors from financing Communist Chinese Military Companies will go into effect. In this Q&A, Matthews Asia addresses key questions on its potential impact for investors.
China’s technology, internet and fintech companies have faced renewed regulatory scrutiny. What are the key points for investors?
As in many countries, regulators in China are thinking more about consumer protection, data security and anti-trust issues related to their country’s tech sector. While we do not believe new regulations will result in dramatic changes to the corporate tech landscape in China, we are monitoring developments to help us understand potential impacts on business models and valuations of companies held by our strategies.
While it appears some Chinese entrepreneurs are being singled out for greater attention, we believe the government’s intention is to limit the political activities of those individuals, rather than to interfere in their commercial activities. We do not believe the government’s aim is to break up the larger Chinese internet companies.
Are you able to comply with the recent Executive Order on Communist Chinese Military Companies?
On November 12, 2020, Donald Trump issued Executive Order 13959 (“E.O.”) which was designed to protect U.S. investors from financing Communist Chinese Military Companies (“CCMCs”). The E.O. prohibits United States persons from purchasing: (i) publicly traded securities of any CCMC (there are currently 35 names that are prohibited under the E.O.), (ii) any securities that are derivative of publicly traded securities of any CCMC, and (iii) any securities that are designed to provide investment exposure to publicly traded securities of any CCMC. The E.O. goes into effect on January 11, 2021 (or the relevant date for securities added after November 12, 2020).
Matthews Asia complies with Executive Order 13959 (“E.O.”) and does not hold any of the 35 named securities that are prohibited under the E.O. as well as the three recently added Chinese telecommunications companies. We are monitoring the situation closely to ensure we continue to comply with the E.O.
The Trump administration issued a further Executive Order on January 13, 2021 amending E.O. 13959 regarding the scope of restrictions on U.S. persons. In particular, it prohibits the “possession” of covered CCMC securities by U.S. persons after the end of the divestment period. Also, on January 14, 2021, the U.S. Department of Defense (DoD) added nine further Chinese companies as CCMCs. Matthews Asia does not hold any of the nine additional names that were added by the DoD as of today, January 14, 2021, and will comply with all the prohibitions of E.O. 13959.
Does Matthews Asia hold any subsidiaries of the named CCMCs?
As a general practice, because of selective disclosure and other compliance regulations, we are not able to address questions about our current holdings, specifically current exposures and any transactional information regarding whether and when we intend to buy, sell or continue to hold a specific company’s security, other than what is posted on our public website.
Will the Executive Order have an impact on certain indexes?
On December 15, 2020, MSCI announced that as of January 5, 2021, it would delete the securities of the Chinese companies referenced in Executive Order 13959 from its Global Investable Markets Indexes. On January 7, 2021, MSCI added three additional securities to be deleted from indices under the E.O. after the close of business on January 8, 2021. According to MSCI, this list of securities to be deleted includes only securities issued by the companies explicitly named in the E.O., but not any subsidiaries or affiliated companies. As of December 31, 2020, we estimate that those 13 securities represented 0.11% of the MSCI ACWI, 0.83% of the MSCI EM index, and 2.13% of the MSCI China index.
Do you think that recent events in Hong Kong will have an impact on the economy and investment environment there?
From an economic perspective, we note that the Hong Kong economy has proved to be very resilient to date in the face of many challenges over past decades, and we believe it is likely to continue to thrive.
From an investment perspective, the overwhelming majority of Hong Kong-listed companies we hold in our portfolios are mainland Chinese firms doing business on the mainland, so we do not believe there will be a significant impact on those companies over the longer term.
There are media reports that the Trump administration is considering prohibiting Americans from investing in Alibaba Group Holding Ltd. and Tencent Holdings Ltd. What is your view on this?
We are aware of the media reports, but have not seen confirmation of this story from U.S. officials, and we note that there will be a change of administration on January 20, 2021. As always, we will comply with all U.S. government rules and regulations as required and applicable to our business.
This material is provided for informational purposes only and should not be construed as investment advice or an offer to buy, sell, or hold any securities.
Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information. The views, opinions and information stated above are as of the date noted herein, are subject to change and may not reflect current views, opinions or exposures. Investments involve risk. Investing in China may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation.
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