By Dawn Lim, Jing Yang, Gordon Lubold and Alexander Osipovich
U.S. officials are considering prohibiting Americans from investing in Alibaba Group Holding Ltd. and Tencent Holdings Ltd., a potential escalation of the outgoing Trump administration's efforts to unwind U.S. investors' holdings in major Chinese companies.
State and Defense Department officials in recent weeks have discussed expanding a blacklist of companies prohibited to U.S. investments over alleged ties to China's military and security services, according to people familiar with the matter. The U.S. government announced its original blacklist in November with 31 companies.
Tencent and Alibaba are China's two most valuable publicly listed companies, with a combined market capitalization of over $1.3 trillion and scores of American mutual funds and other investors holding their shares. Alibaba's New York-listed American depositary receipts fell more than 5% on Wednesday, while Tencent ADRs tumbled by about 4% in the U.S. over-the-counter market.
The blacklist is one of several Trump administration efforts related to investing in Chinese firms. Also on Wednesday, the New York Stock Exchange said it would delist three major Chinese telecommunication carriers targeted by a Trump executive order, after earlier scrapping the plan following "new specific guidance" from the Treasury Department.
The investment decisions aren't the only steps the Trump administration has taken.
After decades of policy broadly aimed at cultivating closer ties, the U.S. has taken a harder line against China in business, politics, trade and markets that have rippled through the global economy.
U.S. companies have also shifted, with some moving production out of China and others more closely examining the security of their trade secrets there. Wall Street, which has long pursued greater connection between the countries' financial markets, is now navigating growing risks to tying investors' money to China.
The State and Defense Departments have debated with the Treasury whether adding Alibaba and Tencent to the U.S. blacklist would have wide capital-markets ramifications, people familiar with the matter said. The plan remains under discussion and might not proceed, the people added.
Alibaba and Tencent are tracked by major indexes including those created by MSCI Inc. and FTSE Russell. Alibaba, listed in both New York and Hong Kong, and Hong Kong-listed Tencent are heavyweights in widely followed global stock indexes. Like most foreign companies, the stocks aren't included on the Nasdaq Composite, S&P 500 or Dow Jones Industrial Average.
In the final weeks of the Trump presidency, U.S. authorities have clashed over the scope of the list of companies barred to American investors. Pentagon and State officials have pursued a broader list including high-profile firms and many subsidiaries of already-named companies in China. The agencies have urged a tougher line to curb China's military and security services' access to data troves, advanced technologies and expertise. The Treasury, worried that forced selling could shake financial markets, wants a narrower list.
The Pentagon, the lead agency managing the list, had no immediate comment. The State Department and Treasury Department had no immediate comment.
A spokeswoman at Alibaba didn't respond to requests for comment. A spokesman at Tencent declined to comment.
China's Ministry of Commerce didn't respond to a request for comment sent outside business hours, and the Chinese embassy in the U.S. referred to a December comment by the Ministry of Foreign Affairs that said, "China firmly opposes the wanton suppression of Chinese companies by the United States," and "the Chinese government will continue to safeguard Chinese companies' legitimate and lawful rights and interests."
While Alibaba and Tencent aren't controlled by the Chinese government, the State Department and Pentagon have long voiced concerns that the companies could be coerced to share data on U.S. citizens and businesses, potentially serving as a conduit for the Beijing to extend its influence.
In a separate action earlier this week, President Trump signed an order prohibiting U.S. individuals and companies from transacting with eight Chinese software apps including Alibaba affiliate Ant Group Co.'s Alipay and Tencent's WeChat Pay. The order takes effect in 45 days, after President-elect Joe Biden is inaugurated on Jan. 20.
Then on Wednesday, the NYSE said the trading of the U.S.-listed shares of China Mobile Ltd., China Telecom Corp. and China Unicom (Hong Kong) Ltd. would be suspended at 4 a.m. ET on Monday.
The exchange's reversal is likely to raise further questions about its handling of the three Chinese stocks. The NYSE said last week that it would delist the three companies to comply with Mr. Trump's order, only to change course on Monday and say that it wasn't delisting them.
A person familiar with the matter attributed NYSE's backtracking Monday to ambiguity over whether the three companies were covered by the order. But the new guidance, which the Treasury shared with the exchange late Tuesday, made it clear that the companies must be delisted. The Treasury posted that guidance online Wednesday morning.
The Trump administration and supporters of a hard line against Beijing criticized the exchange's reversal. Treasury Secretary Steven Mnuchin called NYSE President Stacey Cunningham to voice objections.
The past year has seen several moves that could cut off a recurring investment pipeline between U.S. investors and Chinese firms.
In recent years, scores of Chinese tech companies have raised tens of billions of dollars from U.S. and international investors, allowing foreign investors to capitalize on China's fast-growing economy. As of Dec. 31, Alibaba and Tencent were among top constituents in the MSCI Emerging Markets Index, accounting for a combined 11% weighting. Similarly, the two together claimed a 12% weighting in the FTSE Emerging Index as of Dec. 31.
After releasing its November blacklist, the Pentagon expanded it in December to include companies such as top Chinese chip maker Semiconductor Manufacturing International Corp. and oil giant China National Offshore Oil Corp.
The State Department in August said the U.S. needs to address threats posed by cloud-based systems run by Alibaba, Tencent and Baidu Inc. U.S. officials have become increasingly concerned in recent weeks as The increased scrutiny Alibaba and Ant have faced in China, putting the further at the mercy of Beijing, have raised U.S. officials' concerns in recent weeks, according to one of the people familiar with the matter.
The Chinese government has tightened control over domestic tech champions recently, unveiling a sweeping antitrust regulation aimed at the country's biggest internet platforms, launching an investigation into Alibaba and scuttling Ant's blockbuster initial public offering. Regulators are trying to get Ant to share the troves of consumer-credit data it has amassed with the Chinese central bank's credit-reporting system, The Wall Street Journal reported.
Tencent operates the hugely popular WeChat app, which has become one of Beijing's most powerful surveillance tools. Tencent also owns stakes in several U.S. videogame companies.
Major U.S. asset managers including T. Rowe Price Group Inc., BlackRock Inc. and Vanguard Group are among the top public shareholders of Alibaba and Tencent through funds, according to FactSet data.
Asset managers are lobbying to prevent companies like Alibaba from becoming blacklisted, said a person familiar with large financial firms' conversations with U.S. regulators.
The Treasury said last week that investors would be barred from investing in both blacklisted companies and subsidiaries owned 50% or more by a company named on the list. Derivatives, bonds and depositary receipts -- as well as exchange-traded funds, index funds and mutual funds holding securities issued by these entities in any jurisdiction -- will also be restricted to U.S. investors.
Write to Dawn Lim at firstname.lastname@example.org, Jing Yang at Jing.Yang@wsj.com, Gordon Lubold at Gordon.Lubold@wsj.com and Alexander Osipovich at email@example.com
(END) Dow Jones Newswires