The fallout from U.S. sanctions on Chinese military-linked companies widened as banks and money managers raced to comply with a vaguely worded executive order from President Donald Trump that banned new investments starting Monday.
Goldman Sachs, Morgan Stanley and JPMorgan Chase will delist 500 structured products in Hong Kong, filings show. The city is the world's largest market for such contracts, with more than 12,000 of them, according to Hong Kong Exchanges and Clearing.
Products being pulled include warrants and callable bull/bear contracts on the benchmark Hang Seng Index, the Hang Seng China Enterprises Index and China Mobile. The $14 billion Tracker Fund of Hong Kong managed by State Street Global Advisors Asia, the island's most actively traded exchange-traded fund, won't make new investments in companies covered by the ban after saying it's no longer "appropriate" for U.S. investors.
Investors have struggled to get more clarity on how regulators, exchanges and intermediaries will implement the order Trump issued in the waning days of his presidency. The New York Stock Exchange said last week that it will delist China Mobile and two other Chinese telecommunications companies. Morgan Stanley Capital International deleted the stocks from its global benchmark indexes on Friday, triggering a rush to sell that led to record trading volume in the stocks and that drove China Mobile's share price to a 14-year low.
Trump's order said designated stocks cannot be purchased by Americans starting this week and that holdings by Americans must be fully divested by November, when transactions will be frozen.
For banks, index compilers and money managers, that has added to the challenges of navigating tensions between Washington and Beijing that have increasingly entered the financial sphere. China issued new rules on Saturday to protect its firms from "unjustified" foreign laws by allowing Chinese courts to punish global companies for complying with foreign restrictions.
"This will raise a big dilemma for companies," Jingzhou Tao, an arbitrator with Arbitration Chambers, said in a Bloomberg Television interview. "On one hand, you have these U.S. sanctions, which you must observe, otherwise you get sanctioned by the U.S. government. On the other hand, you have the Chinese government; if they say that you should not observe these sanction-related laws, then you're in a big dilemma."
The delisting of Hang Seng Index products, and State Street's warning that U.S. investors should avoid the tracker fund, show how Trump's order is affecting investment flows beyond just the handful of Chinese companies on the U.S. sanctions list.
The approximately 500 structured products being delisted account for less than 1% of Hong Kong's turnover, according to Bloomberg Intelligence.