BABA Alibaba Group Holding Limited

By Dawn Lim, Jing Yang and Gordon Lubold 

U.S. officials are considering prohibiting Americans from investing in Alibaba Group Holding Ltd. and Tencent Holdings Ltd., said people familiar with the matter.

In recent weeks, State Department and Department of Defense officials have held conversations on expanding a blacklist of companies that are prohibited to U.S. investments because of claimed ties to China's military and security services. The U.S. government announced its original blacklist in November with 31 companies.

The departments have debated with the Treasury Department over whether adding these firms could have wide capital-markets ramifications, the people said. The plan is still under deliberation and may not go through as agencies debate its impact on markets, the people added.

Tencent and Alibaba are China's two most-valuable publicly listed companies with a combined market capitalization of over $1.3 trillion, and their shares are held by scores of U.S. mutual funds and other investors. If enacted, the move would be a major escalation by the exiting Trump administration on its efforts to unwind U.S. investors' holdings in major Chinese companies.

The Trump administration has stepped up efforts to sanction Chinese companies in its final days. On Wednesday, the New York Stock Exchange said it will move ahead to delist China's three biggest telecommunication carriers, backtracking an earlier decision to scrap the plan after receiving "new specific guidance" from the Treasury Department.

On Tuesday, President Trump signed an order prohibiting U.S. individuals and companies from transacting with eight Chinese software apps including Alibaba affiliate Ant Group Co.'s Alipay and Tencent's WeChat Pay. The order takes effect in 45 days, after the inauguration of President-elect Joe Biden.

Alibaba and Tencent are tracked by major indexes including those created by MSCI Inc. and FTSE Russell. Alibaba, listed in both New York and Hong Kong, and Hong Kong-listed Tencent are heavyweights in widely followed global stock indexes. Like most foreign companies, the stocks aren't included in the Nasdaq Composite, S&P 500 or Dow Jones Industrial Average.

In the last few weeks of the Trump presidency, U.S. government officials have clashed over the scope of the list of companies off limits to U.S. investors. Pentagon and State officials have been pushing for a list with broad reach that includes high-profile companies and subsidiaries of already-named companies in China. The agencies have urged a tougher line to curb China's military and security services' access to data troves, advanced technologies and expertise. Treasury, fearing forced selling could rock financial markets, wants a more narrow list.

The Pentagon, the lead agency managing the list, had no immediate comment. The State Department and Treasury Department had no immediate comment.

A spokeswoman at Alibaba didn't respond to requests for comment. A spokesman at Tencent declined to comment.

China's Ministry of Commerce didn't respond to a request sent outside business hours, and the Chinese embassy in the U.S. referred to a December comment by the Ministry of Foreign Affairs that said "China firmly opposes the wanton suppression of Chinese companies by the United States," and "the Chinese government will continue to safeguard Chinese companies' legitimate and lawful rights and interests."

While Alibaba and Tencent aren't controlled by the Chinese government, the State Department and Pentagon have long said they feared that the companies could be coerced into sharing sensitive data on U.S. citizens and businesses with the Chinese government and serve as a conduit for Beijing to extend its influence.

Scores of Chinese tech companies have raised tens of billions of dollars from U.S. and international investors in the past few years, allowing foreign investors to capitalize on China's rapidly growing economy.

Alibaba and Tencent have been among top constituents in the MSCI Emerging Markets Index, accounting for a combined 11% weighting as of Dec. 31. Similarly, the two together have claimed a 12% weighting in the FTSE Emerging Index as of Dec. 31.

Following the November list, Pentagon expanded its list of banned companies in December to include companies such as China's top chip maker Semiconductor Manufacturing International Corp. and oil major China National Offshore Oil Corp.

The State Department in August said the U.S. needs to address the threats of cloud-based systems run by Alibaba, Tencent and Baidu Inc. U.S. officials have become increasingly concerned in recent weeks as Alibaba and Ant come under intense scrutiny at home, further putting them at the mercy of Beijing, according to one of the people familiar with the matter.

The Chinese government has tightened the screws on its tech champions recently, unveiling a sweeping antitrust regulation aimed at the country's biggest internet platforms, launching an investigation into Alibaba and scuttling Ant's blockbuster initial public offering.

In the latest episode, Chinese regulators are trying to get Ant to share the troves of consumer-credit data it has amassed with the central bank's credit-reporting system, The Wall Street Journal reported.

Tencent operates the hugely popular WeChat app, which has become one of the most powerful tools in Beijing's arsenal of tools for monitoring the public. Tencent also owns stakes in several U.S. videogame companies.

Major U.S. asset managers including T. Rowe Price Group Inc., BlackRock Inc. and Vanguard Group are among the top public shareholders of Alibaba and Tencent through funds, according to FactSet data.

Asset managers are lobbying to prevent a situation in which companies such as Alibaba could become blacklisted, said a person familiar with large financial firms' conversations with U.S. regulators.

Last week, the Treasury Department published guidelines that include subsidiaries in the ban if a company named on the list holds ownership of 50% or more in them. Derivatives, bonds and depositary receipts, as well as exchange-traded funds, index funds and mutual funds holding securities issued by these entities in any jurisdiction will also be restricted to U.S. investors.

Write to Dawn Lim at dawn.lim@wsj.com, Jing Yang at Jing.Yang@wsj.com and Gordon Lubold at Gordon.Lubold@wsj.com

(END) Dow Jones Newswires

January 06, 2021 15:02 ET (20:02 GMT)

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