S&P Dow Jones, FTSE Russell To Remove Several Chinese Companies From Their Indices To Comply With U.S Investment Ban On Firms Linked To Chinese Military

·3-min read

S&P Dow Jones and FTSE Russell will remove several Chinese companies from their indices to comply with an executive order passed last month by U.S President Joe Biden that prohibits investment in businesses believed to have ties to the Chinese military.

The removals will force global fund managers to rebalance their investment allocations that mirror the indices, dropping the businesses that are no longer part of those benchmarks. In the first six months this year as many as 36 Chinese companies received a total of US$12.6 billion in their initial public offerings.

The move is set to further deepen trouble for U.S.-listed Chinese firms already dealing with Beijing's sweeping efforts to rein in its tech sector and enforce tighter data security efforts.

S&P Dow Jones and FTSE Russell on late Wednesday announced that it will remove more Chinese companies from their indices to comply with an executive order passed last month by U.S President Joe Biden that prohibits investment in businesses believed to have ties to the Chinese military.

On Jun 3, Biden issued an executive order banning Americans from investing in several Chinese companies with close ties to the Chinese military or those selling surveillance technology to to "facilitate repression or serious human rights abuses".

The executive order prohibits investment in in 59 Chinese companies including telecom behemoth Huawei and largest chipmaker Semiconductor Manufacturing International Corp. (SMIC). The list also included China General Nuclear Power Corp and plastic pipe maker Aerosun Corp.

The ban takes effect from Aug 2.

The executive order prohibits Americans from engaging in the purchase or sale of any publicly traded securities of the 59 blacklisted companies. They are also banned from investing in funds that contain Chinese securities in their portfolios.

The order provides one-year period for Americans already invested in the firms—either directly or via mutual and index or other funds—to divest themselves.

S&P Dow Jones, which maintains the Dow Jones Industrial Average and Standard & Poor’s 500, identified 25 Chinese companies that would be deleted from its index on August 2.

FTSE Russell, another global provider of stock benchmarks and an arm of the London Stock Exchange Group, said it will remove an additional 20 firms on July 28.

Stocks to be removed from the FTSE Russell and the S&P Dow Jones Indices include aerospace-related companies such as Aerospace CH UAV, Avic Aviation High-Technology and Avic Heavy Machinery.

The removals will force global fund managers to rebalance their investment allocations that mirror the indices, dropping the businesses that are no longer part of those benchmarks.

U.S. capital markets have been a lucrative source of funding for Chinese firms in the past decade, especially for technology companies looking to benchmark their valuations against listed peers there and tap into a big liquidity pool.

In the first six months this year as many as 36 Chinese companies received a total of US$12.6 billion in their initial public offerings.

The move is set to further deepen trouble for U.S.-listed Chinese firms already dealing with Beijing's sweeping efforts to rein in its tech sector and enforce tighter data security efforts.

China has cracked down in the past week on several firms looking to list in the United States with cybersecurity investigations. Last week, Beijing announced an investigation into China’s ride-hailing giant Didi Global shortly after the company had its IPO in the US, raising US$4.4 billion

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