Chinese Stocks Drop as U.S. Considers Limiting Investor Flows

(Bloomberg) — Chinese stocks fell Monday after a report that the Trump administration is considering ways to limit U.S. investors’ exposure to Chinese assets.

The CSI 300 Index slipped 0.5% as of the mid-day break, on volume that was about 43% lower than the 30-day average. The moves onshore may be volatile due to thin liquidity ahead of the week-long holiday, as well as the closing of positions typically seen at quarter-end. The strengthened 0.2% to 7.1231 per dollar Monday and the onshore rate was little changed.

While a Treasury official said there are no plans to stop Chinese companies from listing on American exchanges, the added uncertainty comes at a particularly sensitive time for China. The country is stepping up measures to open its markets to global capital, just this month removing a hurdle for foreign investment into stocks and bonds. Officials are also preparing to celebrate the 70th anniversary of the People’s Republic on Tuesday.

“Some risk-averse investors and those in need of liquidity might sell off stocks ahead of the long holiday just to play it safe,” said Sun Jianbo, president of China Vision Capital Management in Beijing. “I’d expect the downside to be limited as the U.S. and China are resuming trade talks.”

Integrating China’s capital markets into the global financial system has been a priority for the country’s policy makers since late 2017. In the year since MSCI Inc. first added mainland shares to its benchmarks, China has been expediting measures that make it easier for overseas investors to manage risk. Index provider Russell also embraced A shares this year, though last week it made the surprise decision to spurn Chinese bonds.

Bloomberg LP, the parent of Bloomberg News, also offers indexes for stocks and bonds. Bloomberg Barclays (LON:) started a phased inclusion of some Chinese sovereign debt into its benchmarks in April.

By the 11:30 a.m. break, overseas investors had sold a net 1.4 billion yuan ($197 million) of A shares via exchange links with Hong Kong. September is still on track to be a record month of buying, according to data compiled by Bloomberg.

Foreigners drive about 10% of daily turnover in China’s domestic stocks, according to data compiled by Bloomberg earlier this year. They own about 3.1% of the retail-dominated $6.7 trillion market, almost as much as the country’s mutual funds. International investors increased their holdings of Chinese debt to 2 trillion yuan in August, about 2% of the country’s bond market.

While winning index inclusion is one way to attract the billions of dollars pegged to major benchmarks, U.S. investment in onshore markets remains limited. Residents had just over $200 billion of long-term mainland Chinese financial assets as of June, according to the U.S. Treasury. That’s little more than double held in South Africa.

Calm had just returned to mainland markets after months of worsening economic data and the twists and turns of the trade war. While there was evidence of profit-taking in stocks last week, volatility in the fell to near its lowest in 19 months. The yuan enjoyed its calmest week since July as traders speculated Beijing wanted to ensure stability ahead of the celebrations.

The Shanghai gauge typically performs well before the National Day holiday, rising on the last trading session in all years but one in the past decade.

Monday will be the last chance for investors to price in the possibility of worsening tensions with the U.S. ahead of another round of trade talks scheduled for October. China’s biannual extended holidays have recently proven to be a vulnerability for mainland investors, who have had to wait to react to bleak news.

That’s a risk they may not want to take this time.

“A lot of retail guys are taking money out of the stock market ahead of the holiday week”, said Gerry Alfonso, director of international business department at Shenwan Hongyuan Group Co.

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