By Hannah Erin Lang

Trade tensions between the U.S. and China are escalating rapidly. Wall Street could be the next battleground.

During his first term, President Trump explored the idea of delisting Chinese stocks from U.S. exchanges, eventually signing an executive order that prohibited Americans from investing in some Chinese companies the U.S. said had aided China's military. In a recent interview, Treasury Secretary Scott Bessent declined to rule out a broader ban.

"I think everything's on the table," Bessent said on Fox Business, when asked if the government would go as far as barring all Chinese stocks from trading on U.S. exchanges. "That'll be President Trump's decision."

A broad delisting of Chinese companies could have serious consequences for financial markets in both countries. Here's what you need to know:

How do American investors typically invest in Chinese stocks?

U.S.-based investors can invest in foreign companies by purchasing American depositary receipts, or ADRs. These are certificates that represent shares in a foreign company.

A bank or broker holds underlying stock in a company and issues ADRs that track the price of those shares. American investors can also gain exposure to Chinese and other international stocks through exchange-traded and mutual funds.

What does it mean to delist a stock? What tools could the Trump administration use?

Delisting means shares are removed from a stock exchange and investors can no longer buy or sell them there. A delisting can be voluntary or involuntary.

Under the Holding Foreign Companies Accountable Act, enacted in 2020, the U.S. Securities and Exchange Commission can ban foreign companies from trading if American regulators are unable to inspect their auditors for three consecutive years. Some Chinese companies have voluntarily delisted in the years after the law was passed.

"The tools with which to do it don't have to be invented," said Steven Schoenfeld, CEO at MarketVector Indexes, a market research and data provider.

The Trump administration could also issue a broader investment ban by executive order, Schoenfeld said. Trump and former President Joe Biden have issued directives in the past targeting specific industries and types of Chinese companies, but not a blanket ban on investing in China.

"It's much more rare, if not unprecedented, to tell Americans where they can invest," said Schoenfeld, who has worked in global market analysis for decades.

What companies would be most affected?

As of March 7, there were 286 Chinese companies listed on major U.S. stock exchanges. Many are smaller, lesser-known firms. Some of the biggest names include:

   -- Tech giant Alibaba Group 
 
   -- Baidu, a search engine and internet company 
 
   -- PDD Holdings, the parent company of e-commerce site Temu 
 
   -- Tencent Music Entertainment Group 
 
   -- JD.com, an e-commerce company 

How would investors be affected?

If Chinese stocks were delisted, investors could convert their ADRs into shares listed on the Stock Exchange of Hong Kong. But it's likely that many investors would opt to simply sell their stake in Chinese firms, Schoenfeld said.

That would send a serious ripple through global markets. Goldman Sachs analysts estimate that U.S. institutional investors currently own about $830 billion worth of Chinese stocks.

A quick selloff would drag down stock valuations and could create liquidity problems. For companies like Alibaba, JD.com or Baidu, average daily trade volumes in the U.S. vastly exceed those in Hong Kong, analysts at Morgan Stanley found.

Investors could try to be patient -- after previous delistings, investors had nearly a year to shed their holdings. But waiting might not produce better results. The value of those securities would likely drop on news that delisted companies were losing access to U.S. capital markets.

If Chinese investors were to unload their U.S. securities in retaliation, it would send shock waves through American markets, too. Chinese investors hold an estimated $370 billion worth of U.S. equities and $1.3 trillion in bonds, Goldman Sachs analysts estimate.

Is a broad delisting likely?

Trump and his team have indicated they are keeping their options open when it comes to the standoff with Beijing. The president has surprised traders in his second term by suggesting that he is willing to pursue policy goals despite pain for financial markets. Still, a delisting of Chinese stocks would be a major escalation.

Among the potential levers the U.S. could pull in the trade war, delisting may be among the least likely, said Zongyuan Zoe Liu, a senior fellow for China studies at the Council on Foreign Relations. One key reason: Unlike tariffs, which can be tweaked, expanded or stripped as negotiations unfold, delisting is permanent.

"This is a weapon the U.S. can use only once," Liu said.

Write to Hannah Erin Lang at hannaherin.lang@wsj.com

(END) Dow Jones Newswires

April 18, 2025 13:20 ET (17:20 GMT)

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