Alibaba Group Holding Ltd. and Tencent Holdings Ltd. led a sell-off in tech stocks as the Trump administration considers banning investment in China’s two most valuable companies.

Alibaba fell more than 5% and Tencent in Hong Kong trading fell as much as 4.4% on Thursday, posting losses on its New York-listed securities. The Ministry of Foreign Affairs, the Ministry of Defense and the Ministry of Finance are involved in the deliberations, according to people who are aware of the talks. Discussions are partly focused on how such a move could affect capital markets, the Wall Street Journal reported on Wednesday.

A ban on the two companies would be the most dramatic escalation in President Donald Trump’s administration to date, given the sheer size of the two companies and the difficulty of unwinding positions. At $ 1.3 trillion, the combined market value of their primary listings is almost twice that of the Spanish stock market, while the companies together account for about 11% of the weighting of MSCI Inc.’s emerging market benchmark.

“If the bans are implemented, it would be a big deal for the market,” said Steven Leung, Executive Director at Uob Kay Hian (Hong Kong) Ltd. “It’s too early to say that. After the start of the Biden administration, the policy could change again. “

If implemented, the ban would further fray the relationship between the world’s two largest economies, which have argued over everything from Covid-19 to Hong Kong. Washington authorities have stepped up efforts to withdraw US capital from Chinese companies over the past few months, adding to economic tensions as President-elect Joe Biden prepares for the takeover this month.

[Bloomberg]

Company representatives did not provide an immediate response when they contacted us. Tencent dollar bond spreads widened up to 20 basis points versus US Treasuries on Thursday, while Alibaba bond spreads were about 15 basis points wider, according to loan dealers. The e-commerce company is said to be planning a dollar bond sale as early as next week, which could raise up to $ 8 billion that could now be threatened by US actions.

What Bloomberg Intelligence Says:

Alibaba could face minimal financial and operational disruption due to a potential ban being considered by U.S. officials that could prevent Americans from investing in the company. Alibaba had $ 60 billion in cash in September and generated $ 6 billion in free cash flow in the September quarter. The double listing of its shares in Hong Kong should reduce the risk of removal from US stock exchanges.

– Vey-Sern Ling and Tiffany Tam, analysts

JD.com Inc. in Hong Kong was down 4.1% after its ADRs were down 7.7%. Pinduoduo Inc. lost 5.6%. The heavily watched iShares China Large-Cap ETF fell 1.2% in the US, while the NASDAQ Golden Dragon China Index, which tracks other major Chinese technology stocks, lost 2.1% on its worst day since November.

Citing national security, Trump had previously signed an executive order in November calling on investors to pull out of Chinese companies associated with the nation’s military. On Tuesday, Trump signed an order banning U.S. transactions using eight Chinese apps, including Ant Group Co.’s Alipay and Tencent’s digital wallets. It is up to Biden to decide whether this policy will be enforced after it comes into effect.

Hasty action has at times caused market confusion and price volatility, such as when the New York Stock Exchange changed course twice this week when it decided to delist three Chinese telecommunications companies. The NYSE is now proceeding with its original delisting plan after US Treasury Secretary Steven Mnuchin disagreed with her decision to give companies a grace period.

The order prohibits trading in the affected securities from January 11th. If Biden allows Trump’s Executive Order to go into effect, US investment firms and pension funds would have to sell their stakes in companies associated with the Chinese military by November 11th given 60 days from this decision to sell.

“We are seeing the worst case nature of the telecommunications companies and ADRs because there is tremendous confusion,” said Nicholas Turner, an economic sanctions attorney with Steptoe & Johnson LLP in Hong Kong. Even if Alibaba and Tencent fend off a delisting threat, US investors will still be banned from buying a wide variety of financial instruments linked to their securities, he added.

The potential US ban comes with increasing pressure in China on Jack Mas Alibaba and Tencent. In recent months, officials have blocked Ant Group’s $ 35 billion IPO, proposed new rules to curb Internet giants’ dominance, and condemned Alibaba and Tencent for takeovers from previous years. A closer look at mergers and acquisitions could increase uncertainty about the growth of large internet companies in China.