JPMorgan Indexes Exclude New Debt From Sanctioned Chinese Firms

JPMorgan Chase & Co.’s widely followed debt indexes will exclude new bonds from Chinese companies that fall under sanctions announced last week by Donald Trump’s administration.

The decision applies to new debt, taps or re-openings by impacted issuers, JPMorgan said in a note to clients on Tuesday. Existing bonds of sanctioned companies will remain in the indexes for now, but JPMorgan will re-evaluate their eligibility “once there is more clarity on the impact to benchmark replication.” The bank declined to comment further when contacted by Bloomberg on Wednesday.

Trump on Nov. 12 signed an executive order barring American investments in Chinese firms owned or controlled by the military, his latest bid to pressure Beijing over what he views as abusive business practices. JPMorgan’s move underscores how the sanctions could have an impact beyond the U.S., by prompting index-tracking investors around the world to avoid new bonds from sanctioned issuers or potentially pare their existing holdings.

Spreads on some of China National Chemical Corp.’s dollar bonds widened to the most since May after Trump’s executive order. They tightened on Wednesday amid some relief that existing bonds would remain in the JPMorgan indexes.

The U.S. Department of Defense added the firm to a list of 11 companies which it claimed have links to the Chinese military in late August. Chinese firms on the full list includes 16 issuers and their subsidiaries, according to JPMorgan’s note.

JPMorgan said its indexes include 72 securities linked to sanctioned companies, adding that their JACI index is expected to be most impacted with all sanctioned firms in scope with a combined weight of 3.7%.

It’s unclear if international broker-dealers will be considered U.S. persons and whether they will be able to transact in securities of sanctioned firms from Jan. 11 onwards, even if it’s to facilitate investors divesting their existing holdings, JPMorgan said. Liquidity in bonds of sanctioned companies could be “significantly impaired” as a result, the bank said.

Bloomberg LP, the parent of Bloomberg News, also produces bond indexes that include Chinese issuers.

©2020 Bloomberg L.P.

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