A confusing call

Will it or won’t it...

In his book Dealing with China, Hank Paulson described the IPO of China Mobile (then known as China Telecom) in Hong Kong and New York in 1997 as “transformational”. The former Wall Street bank boss and ex-US Treasury Secretary recalled how the listing served to “brand” China in global markets, and mark the beginning of wider reforms across state-dominated sectors of the country’s economy. Of course, this would broaden the opportunities for US financial firms too, promising lucrative returns.

And just days after China Mobile’s trading debut, President Jiang Zemin embarked on a nine-day visit to the United States – the first by a Chinese leader in 12 years – as Bill Clinton’s “constructive engagement” strategy kicked into high gear.

Donald Trump, now in the final days of his own presidency, has shown little inclination to follow the same approach. Since losing to Joe Biden last November, one of his first executive orders as outgoing president was to deter further US investment in 31 Chinese firms, including China Mobile. The move came after the Pentagon claimed these entities were controlled by the Chinese military.

Since then a number of global index compilers such as MSCI and FTSE Russell have deleted various Chinese firms from their indices and the New York Stock Exchange caused another major stir on the final day of 2020 by announcing that it had begun proceedings to delist the giant telecoms trio of China Mobile, China Unicom and China Telecom.

Trading in all three would be suspended entirely by January 11, it announced, when Trump’s executive order became effective.

Shares in China Telecom and China Unicom dropped more than 6% during the first trading session of 2021 as a result. China Mobile’s stock also fell more than 4% at one point.

Interest from international investors in the major telecom SOEs had faded in recent years, especially in light of the emergence of higher-growth internet companies from the private sector such as Alibaba and Tencent. Trading volumes in China Mobile’s ADRs totalled just $13.7 billion in 2020, or 29% of the turnover of its Hong Kong-listed shares. By the end of last year, the ADRs were only worth about $2.7 billion, roughly 2% of the company’s market capitalisation. The ADRs of China Unicom and China Telecom are even less significant financially: amounting to about Rmb2 billion ($310 million) combined.

Yet the NYSE’s decision still stoked an angry reaction from the Chinese government, including agencies like the China Securities Regulatory Commission, which slammed the decision as “arbitrary, reckless and unpredictable”.

China’s Ministry of Commerce went further, decrying the NYSE’s move as an “abuse of national security and state power” that defies market logic. The Foreign Ministry had a view too, with its spokesperson telling reporters that the Chinese government would take “necessary measures to resolutely safeguard Chinese companies’ rights and interests”.

That said, some of the comments about heavy-handedness amused overseas commentators, who pointed to Beijing’s fairly frequent market interventions (such as during the ‘Great Fall of China’ in 2015 when stock prices were plummeting; see WiC288).

Nevertheless the NYSE hasn’t looked particularly professional, initially putting out another market-moving announcement this Monday saying that the delisting plan for the telecoms trio was on hold until it received confirmations from the Treasury department on the prohibited companies. This saw the three stocks recover their losses.

That wasn’t the final word on the matter. In a move that Bloomberg described as the latest in a “whirlwind” of policy changes, the stock exchange then made clear that the Chinese telcos would be turfed out on January 11 after all, reportedly after Treasury Secretary Steven Mnuchin intervened against its decision to grant the Chinese firms a reprieve.

Tuesday’s fresh U-turn saw China Mobile shares in Hong Kong plunge as much as 10% this week.

What next? Trump’s final hurrah could be a ban on US investors buying shares in internet giants Alibaba and Tencent, the Wall Street Journal reported. Alibaba’s US-listed shares fell more than 5% on Wednesday.

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