The Dow suddenly plunged during late-morning trading on Friday after Bloomberg published a report exposing that the Trump administration is debating a new policy that would ramp up pressure on the Chinese economy as the two countries prepare to return to the negotiating table.
The policy, if enacted, would limit American investors’ access to the Chinese market, threatening the “goodwill” Beijing and Washington had exchanged in recent weeks.
Dow Recoils as White House Mulls Trade War Escalations
The Dow Jones Industrial Average and its fellow Wall Street stock indices quickly erased their daily gains in response to the report, and by the end of the session, the Dow, S&P 500, and Nasdaq had closed firmly in the red.
Bloomberg: Trump Admin Weighs Crippling Limits on Chinese Investment
The US stock market had enjoyed a relatively bullish morning session on Friday, at least until Bloomberg revealed a Trump administration plan to enhance pressure on a Chinese economy already rattled by sluggish growth and US tariffs.
According to the report, White House officials are currently discussing strategies to limit US investment in China, which recently began removing limits on foreign investment to bolster its ailing market.
At the federal level, the government could instruct pension funds to limit their exposure to the Chinese market.
(Bloomberg) – Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal
— Carl Quintanilla (@carlquintanilla) September 27, 2019
More concerning for investors is that Trump officials have also discussed delisting Chinese companies like Alibaba and Baidu from US stock exchanges, which could dramatically affect index fund portfolios.
Baidu and JD.com, for example, both feature prominently in the Nasdaq 100, though the real chaos will occur in international equity funds.
MSCI allowed Chinese companies to become a much larger weighting in their international indices over the last year. This would be a notable development for all investors. https://t.co/kImw3y6Tgf
— Downtown Josh Brown (@ReformedBroker) September 27, 2019
According to the report, the White House has not decided whether to pursue these policies, but the fact that they are deliberating them at all – with Trump’s approval – could quash rising optimism that the US and China will emerge from next month’s trade talks with a tariff truce in hand.
Dow Futures Imply Slight Recovery
Over the weekend, a US Treasury official denied the most alarming part of that report – that the White House might boot Chinese stocks from US exchanges – which may have contributed to Dow futures’ moderate recovery when trading resumed on Sunday.
Click here for a live Dow Jones Industrial Average chart.