MSCI, FTSE Russell drop Chinese telcos, shares lose $10 billion in value

Global index providers MSCI Inc and FTSE Russell said they would cut three Chinese telecom companies from their benchmarks in response to a US investment ban, crushing the share prices and widening the fallout from the US sanctions.

The deletions add to the suite of firms already cut from indexes because of the US ban and it likely requires passive investors, such as index-tracking funds, to sell the stocks: China Mobile, China Telecom and China Unicom Hong Kong.

All three firms have large numbers of passive investors and their shares fell heavily, wiping out nearly $10 billion in value by the midday break in Hong Kong, in the clearest illustration yet of the investment fallout from the US rules.

In separate statements dated Jan. 7, MSCI said it would remove the companies from its China indexes on Jan. 8 and FTSE Russell said they would be cut from its Global Equity Index series and China A indexes on Jan. 11.

"If you're a passive index provider, of course, you need to get out of the way," said Kay Van Petersen, global macro strategist at Saxo Capital Markets in Singapore.

"And obviously if you're active and you know the index providers are going to have to get out of the way, you're not going to just be sitting around while something is getting sold off."

The index deletions are in response to a November order from President Donald Trump, which bans Americans from investing in Chinese companies that the US deems to have links with China's military, beginning from November 2021.

China has condemned the move as wanton oppression of its companies and several of the affected firms have denied military ties.

The latest deletions followed the New York Stock Exchange confirming it would delist US-traded American Depositary Receipts of the three telecoms on Jan. 11.

That came after the US Treasury clarified that the investment ban extends to subsidiaries with similar names to 35 companies on a Defense Department list of Chinese firms it says have military links.

Fund managers say the market impact may only be shortlived because non-US buyers will replace the passive outflows.

Chipmaker SMIC, for example, is among several to attract interest and is up more than 35% in two weeks despite being covered by the ban and removed from indexes.

But the potential for the ambit of the rules to widen has kept some investors nervous - particularly following reports by Reuters and the Wall Street Journal that the ban could be expanded to include tech giants Alibaba and Tencent.

China Mobile shares slumped 6% to a more than 14-year low by the lunch break in Hong Kong, China Telecom shares slid 8% to a 12-year low and China Unicom shares also fell 8% to a 10-month low. The broader Hang Seng index rose 1.3%. 

China says US behaviour shortsighted

China's foreign ministry on Friday said the United States' behaviour towards three of its telecoms companies is shortsighted after global index providers cut the telcos from benchmark indices.

The behaviour will undermine US interests, foreign ministry spokeswoman Hua Chunying said at a regular briefing.

Global index providers MSCI Inc and FTSE Russell said they would cut three Chinese telecom companies from their benchmarks in response to a US investment ban, crushing the share prices and widening the fallout from US sanctions.