(Bloomberg) – Alibaba Group Holding Ltd. and Tencent Holdings Ltd. sold off technology stocks as the Trump administration considers foreclosing investments in China’s two most valuable companies.

Alibaba fell 3.9% and Tencent 4.7% in Hong Kong trading on Thursday, tracking losses in New York-listed securities. The Ministry of Foreign Affairs, the Ministry of Defense and the Ministry of Finance are among the authorities involved in the deliberations, according to people with knowledge of the discussions. The discussions focus in part on how such a move could affect capital markets, the Wall Street Journal reported earlier Wednesday.

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

“If the bans are implemented, it would be a big deal for the market,” said Steven Leung, Managing Director of Uob Kay Hian (Hong Kong) Ltd. After the start of the Biden administration, the policy could change again. “

If implemented, the ban would further worsen 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 in the last few months of the Trump administration to withdraw US capital from Chinese companies, adding to economic tensions as President-elect Joe Biden prepares to take over this month.

“The US’s behavior violates international trade rules and principles of fair competition,” said Chinese Foreign Ministry spokeswoman Hua Chunying to a question about the possible investment ban at a briefing in Beijing on Thursday. “It undermines the normal market order and the rights and interests of Chinese companies. And it will ultimately also weaken global investor confidence in the US business environment. “

The story goes on

Representatives of the companies had no immediate comment when they contacted us. Spreads on Tencent dollar bonds rose up to 20 basis points versus government bonds on Thursday, while spreads on Alibaba bonds were about 15 basis points wider, according to loan dealers. The e-commerce company was reportedly planning a dollar bond sale that could raise as much as $ 8 billion as early as next week, which could now be threatened by US measures.

What Bloomberg Intelligence Says:

Alibaba could face minimal financial and operational disruption due to a potential ban under consideration by U.S. officials that could prevent Americans from investing in the company. Alibaba had $ 60 billion in cash flow in September and $ 6 billion in free cash flow in September. 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

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JD.com Inc. declined 3.8% in Hong Kong after ADRs fell 7.7%. Pinduoduo Inc. fell 5.6%. The closely 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, fell 2.1% on its worst day since November.

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

Hasty action has at times caused market confusion and price volatility, for example when the New York Stock Exchange reversed twice this week to delist three Chinese telecommunications companies. The NYSE is now continuing its original delisting plan after US Treasury Secretary Steven Mnuchin disagreed with his decision to give the companies redress.

The order prohibits trading in the affected securities from January 11th. If Biden leaves Trump’s executive order, US investment firms and pension funds would have to sell their stakes in companies associated with the Chinese military by November 11. The US notes that more companies have military ties going forward. American investors will have the option to sell 60 days after this decision.

“We are seeing the kind of worst-case scenario with telecommunications companies and ADRs because they have tremendous confusion,” said Nicholas Turner, Hong Kong attorney specializing in economic sanctions. Even if Alibaba and Tencent fend off a delisting threat, US investors will continue to be banned from buying a variety of financial instruments that have their securities exposed, he added.

The potential U.S. ban comes as pressure increases from within China on Jack Ma’s Alibaba and Tencent. In recent months, officials blocked the Ant Group’s $ 35 billion initial public offering, proposed new rules to curb Internet giants’ dominance, and fined Alibaba and Tencent for acquisitions made in previous years. A closer look at mergers and acquisitions could increase uncertainty about the growth of large internet companies in China.

(Updates on stock performance, Chinese Foreign Ministry comment in the sixth paragraph)

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