Chinese Stocks Hit After US Delisting Notice

January 4, 2021 Updated: January 4, 2021

WASHINGTON—Chinese stocks trading on U.S. exchanges dipped on Jan. 4 after the New York Stock Exchange announced that it would delist shares of China’s three large telecom companies in light of President Donald Trump’s new executive order regarding companies with ties to China’s military.

On the first trading day of 2021, a sharp fall in the shares of three Chinese telecom carriers led to an initial sell-off across Chinese shares on U.S. stock markets amid fears of further U.S. sanctions.

The New York Stock Exchange (NYSE) announced on Dec. 31 that it would delist the three state-owned companies China Mobile Ltd., China Telecom Corp. Ltd., and China Unicom (Hong Kong) Ltd.

The announcement came after Trump’s executive order that banned investing in companies with ties to the Chinese military, formally known as the People’s Liberation Army (PLA).

In the coming days, the NYSE will suspend trading of American depositary receipts (ADRs) of these three companies. While these companies are mostly traded in Asia, their ADRs enable U.S. investors to buy shares on American exchanges without the complexity of buying shares overseas.

Three telecom companies will see their securities suspended from trading between Jan. 7 and Jan. 11, according to the statement by the NYSE.

ADRs of China Mobile—which is among the most valuable Chinese companies—dropped nearly 6 percent on Jan. 4 to a 2006 low. China Telecom’s ADRs fell 5.5 percent to the lowest level since 2003, and China Unicom slipped more than 3 percent.

NYSE stated that the three companies have “a right to a review” of the delisting decision.

Trump issued the order in mid-November, banning U.S. investments in Chinese companies designated by the Pentagon as having ties to the PLA, citing threats to U.S. national security.

Last week, the Trump administration extended the investment ban to apply to any subsidiary of a communist Chinese military company. The extension was announced by the Treasury Department, which also stated that it planned to publicly list subsidiaries that were “50 percent or more owned” or “determined to be controlled” by Chinese military companies identified in the executive order.

In addition, exchange-traded funds and index funds will be subject to the investment ban. U.S. investors will be forced to divest blacklisted companies if they bought the shares overseas through these passive funds.

Major index compilers such as MSCI and FTSE Russell have begun removing Chinese stocks from their benchmarks because of the executive order.

Last year, the Pentagon identified a total of 35 Chinese companies as having links to China’s military, and the three Chinese telecom companies were among the designated companies.

On Jan. 4, Chinese oil companies also saw an initial sell-off as investors bet oil producers would be next in line for U.S. delisting.

CNOOC Ltd. (CEO), China’s largest producer of offshore crude oil and natural gas, could be most at risk, according to Bloomberg, as it’s on the Pentagon’s list.

Other oil companies, such as PetroChina Co. and China Petroleum and Chemical Corp., also known as Sinopec, may also face sanctions, as they’re crucial businesses for China’s military.

CNOOC’s ADR fell 4.2 percent on Jan. 4, while PetroChina was little changed and Sinopec rose 3.5 percent after an initial decline.

Chinese internet stocks also came under pressure due to U.S. delisting news as well as China’s tightened regulations on financial technology companies such as billionaire Jack Ma’s Ant Group.

The Pentagon is expected to add more than a dozen more Chinese companies to its blacklist in the coming days, according to a person familiar with the discussions. Hence, the investment ban will be expanded to include more listed PLA companies and their subsidiaries.

More Chinese companies face delisting risk due to other measures by the U.S. Congress. Last month, Trump signed legislation into law that would require foreign companies trading on American exchanges to meet U.S. accounting standards, a move that would end preferential treatment given to Chinese companies.

Under the law, Chinese companies that fail to comply with the Public Company Accounting Oversight Board’s audits for three consecutive years will be subject to delisting from U.S. exchanges.

Frank Fang contributed to this report.

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