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China’s Three Big Telcos Slide on NYSE Move to Delist Shares

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(Bloomberg) --

China’s state-owned telecommunications companies declined in Hong Kong after the New York Stock Exchange said it’s delisting them to comply with a U.S. executive order that sanctioned companies identified as affiliated with the Chinese military.

Shares of China Mobile Ltd., the largest of the three, fell as much as 4.5% on Monday to their lowest level since 2006, while China Telecom Corp. dropped 5.6%. The two posted their biggest intraday losses since mid-November. China Unicom Hong Kong Ltd. slipped 3.8%. The stocks pared most of those losses later in the day.

The American depositary receipts of the three firms will be suspended from trading between Jan. 7 and Jan. 11, and the process of delisting them has started, NYSE said. The nation’s oil majors including CNOOC Ltd. also fell on concerns they will be targeted next for delisting in the U.S.

“It’s largely a blow to sentiment” that could be temporary, said Mark Huang, an analyst at Bright Smart Securities in Hong Kong. “Though the ADRs are not exceptionally large, there’s some impact on fundraising. Some passive index tracking funds may be selling to avert risk. More importantly, this is another reason to dump telecoms and pursue outperforming sectors.”

NYSE’s move followed an order by U.S. President Donald Trump in November barring American investments in Chinese firms owned or controlled by the military, in a bid to pressure Beijing over what it views as abusive business practices. China’s securities regulator said given the small amount of U.S.-traded shares at each of the three phone companies, the impact on them would be limited and they are well positioned to handle any fallout.

Direct Support

The U.S. considers the three as Communist Chinese military companies, which are controlled by or affiliated with the Chinese military or a ministry of the Chinese government, as well as providing services for those bodies, according to the National Defense Authorization Act for Fiscal Year 1999 and its amendments. These firms directly support the Chinese military, intelligence and security apparatuses and aid in their development and modernization, Trump said in his executive order.

In a December article, Secretary of State Michael Pompeo discussed how U.S. investors are funding “malign PRC companies” on major indexes such as MSCI and FTSE.

The delisting is more of a symbolic blow amid heightened geopolitical friction between the world’s two largest economies, as they are thinly traded on the NYSE. The companies also get almost all of their revenue from China.

The decision “may impose short term selling pressure on the stocks,” Citigroup Inc. said in a research report. “However, Chinese telcos’ operations are mainly domestic focused and their sound fundamentals along with recovery trends and positive cash flows will not be affected by the delisting, in our view.”

Thin Volume

The ADRs total less than 20 billion yuan ($3.1 billion) and account for at most 2.2% of the total shares each, the China Securities Regulatory Commission said in a statement Sunday. China Telecom has 800 million yuan of ADRs and China Unicom has about 1.2 billion yuan.

“The recent move by some political forces in the U.S. to continuously and groundlessly suppress foreign companies listed on the U.S. markets, even at the cost of undermining its own position in the global capital markets, has demonstrated that U.S. rules and institutions can become arbitrary, reckless and unpredictable,” the CSRC said. “It is certainly not a wise move.”

Form 25

Typically, a company is moved off the exchange as soon as it’s practical and on to an over-the-counter listing. The exchange then files a Form 25 to the U.S. Securities and Exchange Commission that formally acknowledges the change. The company immediately informs all shareholders of the delisting as well. Shareholders can choose to sell -- at the inevitably lower price -- or maintain their ownership of the company. On the final day of the public listing, the shares stop trading and are transferred to new brokerage accounts to hold for the shareholders.

Index provider FTSE Russell will say Monday whether it plans to remove more Chinese stocks from its benchmarks, after the U.S. added to its list of sanctioned securities in recent weeks. FTSE Russell had already listed eight company deletions in early December, a decision that was later followed by peers MSCI Inc. and S&P Dow Jones. The changes from FTSE Russell will be effective from the start of trading on Thursday.

In separate statements Monday, each telecommunications operator said it “regrets” NYSE’s actions, and said the decision might affect the prices and trading volume of the companies’ shares. All three companies said they hadn’t received any notification from the NYSE about the delisting.

‘Lawful Rights’

China Unicom and China Mobile said they’re reviewing ways to protect the companies’ “lawful rights.” China Telecom said it’s considering “corresponding options” to “safeguard the legitimate interests of the company.”

China’s Ministry of Commerce said on Jan. 2 that the country will adopt necessary actions to protect the rights of Chinese companies and hopes the two countries can work together to create a fair, predicable environment for businesses and investors. Beijing has limited options to retaliate directly since American companies hardly rely on the Chinese market for financing. China has been seeking to avoid escalating the dispute with Washington before Joe Biden takes office in a few weeks. China’s Ministry of Foreign Affairs didn’t immediately respond Monday to a request for comment.

CNOOC fell as much as 5.7% in Hong Kong on Monday, its biggest intraday loss since Dec. 1. PetroChina Co. dropped 2.9% and China Petroleum and Chemical Corp., also known as Sinopec, slipped 1.4% before reversing the drop.

China’s largest offshore oil producer CNOOC could be most at risk as it’s on the Pentagon’s list of companies it says are owned or controlled by Chinese military, according to Bloomberg Intelligence analyst Henik Fung. PetroChina and Sinopec may also be under threat as the energy sector is crucial to China’s military, he said.

A Sinopec spokesperson declined to comment. Cnooc and PetroChina didn’t immediately respond to emailed requests for comment.

(Updates with U.S. claims in sixth paragraph)

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