Trump administration officials are discussing ways to limit U.S. investors' portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations.
The discussions are occurring as Washington and Beijing negotiate a potential truce in their trade war that's rattled the world's two biggest economies and investors for more than a year. They also come as China is removing limits on foreign investment in its financial markets. A U.S. crackdown on capital flows would therefore expose a new pressure point in the economic dispute and cause disruption well beyond the hundreds of billions in tariffs the two sides have levied against each other.
Among the options the Trump administration is considering: delisting Chinese companies from U.S. stock exchanges and limiting Americans' exposure to the Chinese market through government pension funds. Exact mechanisms for how to do so have not yet been worked out and any plan is subject to approval by President Donald Trump, who has given the green light to the discussion, according to one person close to the deliberations.
Trump officials are also examining how the U.S. could put limits on the Chinese companies included in stock indexes managed by U.S. firms, three of the people said, although it's not clear how that would be done. More Chinese companies in recent years have been added to major indexes that a broad array of investors have access to.
For instance, hundreds of Chinese businesses have been added into the MSCI Inc.'s indexes since last year — raising questions from Sen. Marco Rubio, R-Fla., and others on Capitol Hill who are advocating for stronger investment restraints and greater scrutiny for Chinese companies in stock indexes and U.S. pension funds. Bloomberg Barclays began adding Chinese bonds to its flagship Global Aggregate Bond index in April.
The S&P 500 index sold off initially after the news and was down about 0.3%. Meanwhile, the 10-year Treasury yield fell to its lowest level of the day as investors sought a haven and stabilized little changed from Thursday's closing level. The offshore yuan fell 0.3% and touched its weakest level since Sept. 6.
The White House has been discussing its plans with Mr. Rubio. It is now considering whether to back legislation he put forward over the summer that provoked much debate over the issue of how to protect U.S. investors with funds allocated into what are often opaque Chinese companies.
The White House has not had any discussions with the Chinese government over the issue, said one person close to the administration. It also wants to keep any action isolated from the broader trade negotiations now underway, the person said.
But high on the list of U.S. concerns is the unusual influence the Chinese government has over private sector companies and restrictions Beijing places on the release of some financial information of even listed Chinese firms.
The fresh momentum behind the effort is partly due to a push from lawmakers to demand reciprocity with Beijing and a pending deadline for the government's main retirement savings fund — administered by the Federal Retirement Thrift Investment Board — to channel billions of dollars into Chinese companies next year, according to several people involved in the discussions.
The National Economic Council has been chairing meetings on the issue and the Treasury Department and National Security Council are involved as well, people familiar with the discussions said. While action is not imminent, according to the people, Mr. Trump's advisers are talking through the various options and the expected impact.
At a dinner hosted by the Center for Strategic and International Studies in Washington last week, a group of China and finance experts debated the value and risks of a financial decoupling from Beijing, including how it could be done and what the impact on U.S. investors would be.
Among the speakers was White House economic adviser Larry Kudlow, who declined to discuss any specifics, according to people who attended the dinner.