Pedestrians wearing face masks walk past a stock market display board showing the Hang Seng Index losses in Hong Kong in March 2020. History is repeating. Photo: AFP / Miguel Candela Poblacion / Anadolu

Units in Tracker Fund of Hong Kong (TraHK), managed by State Street Global Advisors Asia, will not be offered in the United States or to US citizens outside the country as the fund will continue to trade in US-blacklisted companies.

US citizens, permanent residents, entities organized under US laws or any persons in the US will not be able to trade any units in TraHK after June 3, 2022, according to an amendment of the prospectus issued by SSGA Asia, which is the Asian unit of the Boston-based State Street Corporation.

TraHK was set up after the Asian Financial Crisis in 1977 when Hong Kong protected the value of its dollar by acquiring a substantial portfolio of local shares. The government launched TraHK in November, 1999, to dispose of its portfolio in an orderly manner.

SSGA Asia warned that if US citizens continued to hold any units in TraHK after June 3 next year, US law could prevent them from disposing of or otherwise dealing in their units.

It added that the changes would not affect the operation or the manner in which TraHK was being managed and they would not result in any material change to the investment objective or risk profile of the exchange-traded fund.

In light of the Executive Order issued by then US president Donald Trump on November 12, 2020, SSGA Asia said on January 11 this year that TraHK would not make any new investments in companies that the US has sanctioned for alleged ties to the Chinese military. 

“As a result of the Executive Order, TraHK is no longer appropriate for US persons to invest. You should consider whether this is an appropriate investment for you,” SSGA Asia told US investors in a statement.

On January 12, Joseph Yam, an Executive Council member and the former chief executive of the Hong Kong Monetary Authority, said the US sanctions meant that SSGA Asia would be no longer fit for duty to track the Hang Seng Index.

Joseph Yam said US sanctions meant that SSGA Asia would be no longer fit to track the Hang Seng Index. Photo: AFP / Wang Zhou Bj / Imaginechina

On January 13, SSGA Asia reversed its decision to stop buying shares in sanctioned Chinese firms. It said it would continue to invest in all of TraHK’s assets in shares of constituent companies of the Hang Seng Index in substantially the same weightings as they appeared in the Hang Seng Index.

Andrew Wong, chairman of Anli Holdings Ltd, said he was surprised by SSGA Asia’s latest action to forbid the sales of TraHK units to US citizens, although the move was understandable amid the high political tensions between China and the US. Wong said TraHK would face some fluctuations in the short term due to the changes.

Kenny Tang, chairman of The Hong Kong Institute of Financial Analysts and Professional Commentators Ltd, said he believed SSGA Asia’s latest move could be a result of the recent political tensions between China and the US.

However, Tang said the changes would not have a significant impact on the unit price of TraHK, which tracks the Hang Seng Index and does not solely represent the performance of a single company. He added that US investors who hold TraHK units would be affected as they had to buy blue chips in Hong Kong directly to track Hong Kong’s stock market.

Asian Financial Crisis

In July 1997, the Asian Financial Crisis broke out after Thailand devalued its currency relative to the US dollar. The devaluation pressure spread to other countries and places in Asia, including Hong Kong. In August 1998, the Hong Kong government acquired many Hong Kong shares and helped the city safeguard its Hong Kong dollar peg.

In November 1999, the government launched TraHK to dispose of its portfolio in an orderly manner.

SSGA Asia was appointed as the manager and State Street Bank and Trust Company was appointed as the trustee of TraHK. As of October 15, 2002, of the Hang Seng Index constituent stocks purchased by the Hong Kong government, approximately HK$140.4 billion (US$18.06 billion), had been returned to the market.

Currently, the size of TraHK is about HK$96.77 billion. According to the Central Clearing and Settlement System, HSBC is the biggest investor of TraHK with a 33.34% stake, while JP Morgan Chase Bank has 1.55% and Interactive Brokers has 0.85%.

The Hong Kong stock exchange. Photo: AFP / Anthony Wallace

On Friday, the Hang Seng Index fell 354 points, or 1.35%, to 25,961. The Shanghai Composite Index declined 14 points, or 0.42%, to close at 3,397.

Eugene Law, a director at China Galaxy Securities Co Ltd, said it was not likely that the decline of the Hang Seng Index on Friday was caused by TraHK’s latest announcement as non-US investors could still purchase the fund.

Law said after Beijing unveiled new rules to regulate China’s tutorial markets, the Hang Seng Index dropped 2,600 points between last Friday and this Tuesday and then rebounded by more than 1,200 points on Wednesday and Thursday.

He said it was normal to see a correction on Fridays, especially when individual investors were afraid of any policy announcement in the coming weekends.

Law said over the medium term, the stock market sentiment in Hong Kong would depend on whether the US would impose more sanctions on listed firms.

Last Friday, China announced stepped up restrictions on the private education industry and banned educational training institutions from raising money through stock listings. Shares of the US-listed Chinese tutorial firms, including TAL Education and New Oriental Education and Technology, plunged.

The panic hit the Hong Kong markets and the Hang Seng Index fell by 9.5% between last Friday and this Tuesday.

On Tuesday, investors were scared by unverified rumors that US funds were offloading China and Hong Kong assets, according to a Bloomberg report. Although the rumors could not be verified, the Hong Kong media reported on Tuesday evening that Beijing would implement its newly passed Anti-Foreign Sanctions Law in Hong Kong in late August.

Political commentators have said the US and China’s competing sanctions and anti-sanctions laws would accelerate financial decoupling between the two sides. 

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