FTSE Russell drops eight China firms from indexes

Companies such as  Hangzhou Hikvision, China Railway Construction Corp, and China Spacesat were blacklisted by the US for ties to the Chinese military; and more could be dropped, the index provider says

by Ross Kerber and Alexandra Alper
FTSE Russell drops eight China firms from indexes
A street cleaner walks past the London Stock Exchange in the City of London in March 2020. File photo by Reuters.

(ATF) Index provider FTSE Russell has said it will delete shares of eight Chinese companies after they were blacklisted by the United States.

The eight include video security firm Hangzhou Hikvision, China Railway Construction Corp, and China Spacesat.

The move, on Friday, follows a US order restricting purchase of shares in companies allegedly backed by the Chinese military.

It shows that recent efforts by the Trump administration to give teeth to the blacklist of companies allegedly backed by China's military could crimp US investments in the country, which are often held in passive products built on broad indexes.

Todd Rosenbluth, head of ETF and mutual fund research for CFRA, told Reuters that so far the removals would seem to have a limited impact on most US investors, as few large Chinese companies have been restricted. “We would expect all index providers to ultimately remove some Chinese securities in an effort to comply with the US restrictions,” he said.

In a statement sent by a spokesman for owner London Stock Exchange Group, FTSE Russell said it acted on feedback from index subscribers and other stakeholders, and was following its policy when sanctions are imposed that restrict investments.

The group said the deletions from its FTSE Global Equity Index Series and several others would take effect on December 21.

A spokesman said its treatment of the companies remains under review in other indexes, including its FTSE China and China A products, considered China domestic indexes.

Rival index provider MSCI Inc had previously said its products would "reflect any necessary changes" depending on US law. 

The executive order, published last month by the White House, bars US investors from buying securities of the blacklisted firms, starting in November 2021.

A spokeswoman for MSCI said it had sought feedback from market participants on the order, including any practical implications on the use of MSCI indexes and whether any changes to existing indexes or the introduction of new indexes "may be necessary or helpful to maintain the investability of relevant MSCI indexes and assist investors to comply with the order." 

"We welcomed feedback until December 4," the spokeswoman said. "We aim to communicate the results of the consultation soon." 

The Financial Times reported that Nasdaq is evaluating the issue and could publish its conclusion next week. 

FTSE Russell, which previously said it was reviewing securities, said it could drop more companies based on the findings of US officials.

Pentagon list

All eight companies to be dropped figure on a list of "Communist Chinese Military Companies" compiled by the Pentagon.

It also includes China Communications Construction Co Ltd, China Nuclear Engineering & Construction Corp Ltd, CRRC Corp Ltd, Dawning Information Industry Co Ltd and China National Chemical Engineering Co Ltd.

A Hikvision spokesman said the decision was "groundless" as the company had never participated in research and development work for military applications. 

"Hikvision has tried to fully cooperate with the US government and transparently answer policymakers' questions," the spokesman said in a statement.

"We have tried to correct misunderstandings about the company and our business. We will continue to try to do so."

China's top chipmaker SMIC and oil giant CNOOC. were among four more companies the Pentagon added to its list of barred firms this week. 

FTSE Russell spokesman Tim Benedict said the company was aware of those additions, adding, "We will evaluate those in due course."

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