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Hong Kong’s biggest ETF resumes purchases of US-banned stocks

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(Bloomberg) – The largest exchange-traded fund that tracks the Hang Seng Index will resume buying shares of Chinese companies included in a US investment ban, marking a U-turn for State Street Corp. after being criticized by the former Hong Kongs central bank. chief.

The $ 13 billion Hong Kong Tracker Fund, the city’s most actively traded ETF, said in a statement on Wednesday that it had reversed a decision announced two days earlier to stop making new investments in companies included in the US ban. The about-face boosted stocks in China Mobile Ltd., which rocked sharply over the past week amid confusion over how global investment funds would respond to the US order.

State Streets’ initial move caught the attention of the Hong Kong Monetary Authority and was criticized by former HKMA chief Joseph Yam in interviews with local media. U.S. banks and fund managers are responding to President Donald Trump’s ban on investing in companies known to be owned or controlled by the Chinese military.

State Street said in a separate statement Thursday that the ban does not apply because the Tracker Fund and its manager, State Street Global Advisors Asia, are considered non-U.S. Persons.

The Asia unit is able to continue to manage the fund portfolio to track the Hang Seng Index, including making new investments in decree-sanctioned securities, he said. The firm reiterated Wednesday that the Tracker Fund is no longer suitable for US investors.

The HKMA has taken note of the latest developments and will continue to monitor the matter closely, she said in an emailed statement.

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China Mobile, one of three Chinese telecommunications operators included in Trump’s ban, climbed to 3.4% Thursday morning in Hong Kong. The stock has a 2.6% weight in the Hang Seng Index, according to data compiled by Bloomberg.

The Tracker Fund was created in 1999 to sell shares acquired by the Hong Kong government in its fight against speculators during the Asian financial crisis. It is now widely used by institutional investors as an indicator of the Hong Kong stock market or to hedge risks. Hang Seng Bank Ltd. provides a competing product that is roughly half the size of the State Street ETF.

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The issue threatened to disrupt Hong Kong’s pension industry, as eight of the city’s 18 mandatory provident fund scheme sponsors provide the Tracker Fund as an investment option, according to MPF Ratings Ltd. These include plans provided by Principal Trust Co. Ltd., Fidelity and Invesco Ltd., according to the website.

MSCI Inc. and S&P Dow Jones announced last week that they would abandon Hong Kong-traded shares of China Mobile, China Telecom Corp. and China Unicom Hong Kong Ltd. benchmarks. This prompted index funds to unwind their short-term positions, pushing the trading volume of stocks to 18 times the daily average for the previous three months.

BlackRock Inc. has also reduced its holdings and plans to continue selling, a person familiar with the matter said this week. The world’s largest fund manager has an ETF that tracks the Hang Seng.

The Vanguard group said this week that it had liquidated all of its stakes in Chinese companies sanctioned by the United States.

(Updates with the HKMA statement in the sixth paragraph)

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