Markets Jan 08

The Trump China trade starts to unwind

Chinese bargain hunters pile into stocks blacklisted by outgoing president as he loses his grasp on power – and his reputation dives following US Capitol siege

The Trump China trade starts to unwind
Oil explorer CNOOC is one of the stocks that have benefited from Chinese investors backing companies that have been singled out by Trump. Photo: Reuters

(ATF) The Trump trade unwind is beginning in China: As the outgoing US president loses cabinet members and support from his own party, investors are beginning to do the same.

Bargain hunters are moving into the stocks that Trump’s anti-China policies have turned into pariahs. The Chinese-listed shares of China Railway Construction (CRCC) and oil explorer CNOOC have benefited from expectations that incoming president Joe Biden will reverse his predecessor’s measures.

Trump signed an executive order on November 12 that bars US securities investment in Chinese companies allegedly owned or controlled by the Chinese military.

He is considering expanding that blacklist of 35 firms to include Alibaba and Tencent.

As US investors rush to sell shares in the sanctioned companies and their subsidiaries before the executive order takes effect on January 11, Chinese investors are swooping in.

CRRC, CNOOC

Since the order was announced, shares CRCC and CNOOC via the China-Hong Kong Connect roughly tripled, according to bourse operator Hong Kong Exchanges and Clearing. 

Traders are sensing a shift in approach to China as Trump loses his grip on power and his reputation plummets following his encouragement of a siege on the US Capitol earlier this week.

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Matt Pottinger, a key adviser on Chinese policy, joined staff who quit the administration in reaction to the mob violence. Transportation secretary Elaine Chao, the wife of Senate majority leader Mitch McConnell, and Education secretary Betsy DeVos also resigned.

The departure of Chao and DeVos will hamper the Trump administration's ability to get things done prior to the handover to officials selected by Biden.  

Other blacklisted stocks, including railway equipment maker CRRC, China Communications Construction and semiconductor giant SMIC also witnessed heavy money inflows.

’Name Cards'

Zhu Haifeng, a veteran Chinese retail investor, said he bargain hunted in CNOOC and CRRC, which both had lost as much as 27% since the Trump order.  

"They are globally competitive companies, and are China's 'name cards'," said Zhu, who sees limited impact on the companies' fundamentals from the US sanctions. 

Wan Chengshui, portfolio manager at Hangzhou-based Golden Eagle Fund Management, said he plans to increase his holdings in Tencent, if prices fall further.

"Trump politicized everything in the name of national security. When Biden takes office, I think things will take a turn for the better," said Wan, predicting Trump's executive order will be nullified, and sanctions against Tencent and Alibaba won't materialize.

Wan is not alone. 

When Tencent slumped nearly 5% in Hong Kong following news of the potential blacklisting on Thursday, Chinese investors ploughed a net HK$4.6 billion ($593.3 million) into its shares via a cross-border trading channel, making it the most actively traded stock under the scheme that day. 

Global index publishers MSCI, FTSE Russell and S&P Dow Jones Index have all scrambled to delete the blacklisted securities from their global benchmarks, forcing passive investors to shed those holdings. 

Buying opportunity

Phillip Wool, head of investment solutions at Rayliant Global Advisors, said investors could find bargains as active investors dump shares to front-run passive outflows.

"Non-US investors will look at prices of those stocks falling and, at some point, decide it's a buying opportunity," Wool said. 

Meanwhile, uncertainty lingers around the scope and implications of Trump's executive order, while the gradual expansion of the list is another guessing game, Wool said. 

Therefore "there's also a potential opportunity for active investors in terms of outguessing the rest of the market as to how the political situation is going to unfold”.

After making U-turns twice this month on the issue, the New York Stock Exchange on Wednesday said it will delist three Chinese telecom companies.

Since NYSE's first delisting announcement on January 1, Chinese investors have been adamant buyers. Mainland holdings under Connect in China Mobile, China Telecom Corp and China Unicom Hong Kong, have jumped 37%, 28% and 41%, respectively.

  • Reporting by Reuters

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