U.S. curbs on investors owning securities from a number of Chinese companies could affect as much as $60 billion worth of bonds and spark hefty outflows through forced selling, JPMorgan wrote in a note to clients.
Donald Trump’s White House issued an executive order in November banning Americans from investing in companies the U.S. Defense Department says have ties to China’s military – an assertion many of the firms deny and that China’s government says lacks evidence.
While a number of the 44 firms listed on the Defense Department list have been cut from various equity indexes or seen their securities delisted from the New York Stock Exchange, fixed income markets are still grappling with the impact as many bonds are issued through subsidiaries rather than main companies.
In a note to clients written earlier in the week and ahead of the publication of a full list of subsidiaries that are owned 50% or more by Communist Chinese military companies, JPMorgan estimated that around “$55-60 billion of bonds would be affected if/when the Treasury acts.”
Democratic President Joe Biden, who took office on Wednesday, has not spelled out any plans for his predecessor Donald Trump’s executive order forcing the divestment but could easily revoke it.
Much focus was on debt issued by China National Chemical Corporation (ChemChina) – of the affected issues the most widely owned by U.S.-based investors or those with a U.S. presence, according to JPMorgan.
ChemChina had already suffered $1 billion of forced selling in the wake of the executive order and could see another $1.3 billion of outflows from affected investors, JPMorgan calculated.
Looking at China National Offshore Oil Corp’s (CNOOC) $19.5 billion of U.S. dollar-denominated debt, over $3.2 billion was held by funds domiciled in the United States and $3.5 billion could be affected if the scope was broadened to all asset managers with U.S. presence, JPMorgan found.
“However, we think that for investors who can buy the bonds, they should use that round of selling, which we think would be the last round, if at all, to take the opposite view and buy some of these affected bonds,” JPMorgan said.
For the companies themselves, removing U.S. investors from the equation would only have a limited impact, JPMorgan added.
“Their dependence on offshore investors for funding needs is low with offshore USD bonds forming a very small part of their capital structure,” JPMorgan analysts wrote.