If the Trump administration limits investment in China, experts say it's US investors who could pay a steep price
- If the Trump Administration were to limit US investment flows into China, it could ultimately hurt US investors, industry watchers told Markets Insider.
- Experts say this is because billions of dollars are in assets that track indexes exposed to China.
- In addition, if US foreign investment to China were limited, it could weaken the yuan further and undermine tariffs levied by the US.
- Read more on Business Insider.
If the Trump White House were to curb investment in Chinese companies, it could harm US investors, industry watchers say.
"The impact on American investors could be significant," Arthur Dong, professor at Georgetown University's McDonough School of Business, told Markets Insider in an interview.
This is because billions of dollars of assets track indexes that have exposure to China, a high-growth emerging market, he said.
A number of indexes have been ramping up allocations to Chinese equities and debt. As it stands right now, about 33% of the MSCI Emerging Market Index is in Chinese stocks. In 2017, MSCI estimated that $1.9 trillion in assets are benchmarked to the EM index, and that more equity ETFs benchmark to MSCI than any other index provider.
Other providers have high allocations to Chinese debt. In January, Bloomberg confirmed that Chinese renminbi-denominated government bonds and policy bank securities would be added to the Bloomberg Barclays Global Aggregate Index. In April, the index announced it would add 364 onshore Chinese bonds to the index over 20 months, which analysts estimated could attract as much as $150 billion in foreign inflows to China's bond market.
If indexes had to drop all exposure to China, investors in the US would "potentially miss out on some opportunities where those opportunities may be very high growth or high flying companies now or into the future," Dong said.
Recent events suggest investors are wary of the potential limits. US stocks fell on Friday when Bloomberg first reported the White House discussed curbing investor flows to China. On Saturday, US Treasury officials walked back the Friday report, saying that there are no plans to stop Chinese companies from listing on US exchanges.
A control on capital flows would be yet another escalation of the trade war between the US and China, Dong said. If the US were to close off foreign direct investment to China, it would likely hurt businesses as companies from Alibaba to Baidu have been able to access the American capital markets, Dong said. For some companies, the depth and breadth of US markets has accelerated their development and growth, he said.
But there would be unintended consequences as well, wrote Steven Wieting, chief investment strategist at Citigroup Private Bank, in a note to clients Monday. One is that less investment in US dollars would negatively impact the Chinese yuan, which could drag down other emerging-market currencies.
A weaker yuan also directly undermines Trump's trade goals by easing the impact of tariffs levied against China - this is why when China let the value of the yuan slip below 7 to the US dollar, Trump and the US Treasury called the country a currency manipulator.
"The US has made it clear that policies leading to US dollar appreciation are anathema to the manufacturing sector revival it seeks," Wieting said.