MSCI cuts China telcos from indexes after Trump ban; shares fall

MSCI Inc. will remove China’s three major telecommunications companies from its benchmark indexes, adding fresh selling pressure to stocks that have swung wildly this week on confusion over whether they should be included in a US ban on investments in Chinese companies with military ties.

The index provider’s decision to cut China Mobile Ltd., China Telecom Corp. and China Unicom Hong Kong Ltd. at the close of business on Friday will apply to the companies’ Hong Kong-listed shares. That means it could have a substantially larger impact on investment flows than the New York Stock Exchange’s closely watched decision on Wednesday — after two about-faces — to delist the companies’ thinly traded US shares.

Shares of China Unicom dropped 11 per cent in premarket Hong Kong trading, while China Mobile and China Telecom fell about 10 per cent.

S&P Dow Jones Indices also said on Thursday it will remove the three telecom companies, after earlier canceling plans to do so in a series of flip-flops that mirrored those at NYSE. For its part, FTSE Russell is removing China Mobile and China Telecom from its FTSE China 50 Index effective from Monday’s open.

The drama has confounded investors since Donald Trump issued an executive order in November barring investments in companies deemed by the US to be owned or controlled by China’s military. The ambiguously worded order was part of Trump’s effort to punish China in the waning days of his presidency. His administration has sought to sever economic links and deny Chinese firms access to American capital, especially those judged to pose a threat to US national security.

The three telcos said on Thursday that they have complied with all rules since their listing in the US and they will seek professional advice to protect their “lawful rights” or “legitimate interests.” They all advised investors to exercise caution when dealing in their securities.

Index providers including MSCI help guide the investment of trillions of dollars by exchange-traded funds, mutual funds and other money managers that closely track benchmark equity gauges. China Mobile is among the largest stocks in the MSCI China Index, with a weighting of about 1.1 per cent, data compiled by Bloomberg show. The company’s New York-listed shares fell 6 per cent at the close on Thursday, sliding a further 3.4 per cent in extended trading after MSCI’s announcement.

Investors are watching closely whether the US will expand the scope of its investment restrictions to cover other blue-chip Chinese companies. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. led a selloff in tech stocks on Thursday after reports that the Trump administration is considering adding them to its list of banned companies. The two companies have a combined market value of $1.3 trillion.