Tensions between the US and China are flaring up again, but tariffs probably aren’t on the table this time. With pressure mounting on Chinese stocks listed in the US, including those widely held in emerging-market portfolios, investors need to consider how to prepare for the mounting risks.

Four months after the phase-one trade deal raised hopes of a US-China de-escalation, the pandemic has fueled fresh sparring between the superpowers. The US is pressing the World Health Organization to investigate China’s handling of the global outbreak. More measures are preventing US technological exports to China. Supply chains through China are being shaken up by unresolved political issues and corporate reconfigurations amid the global shutdowns.

These developments aren’t surprising. While both sides took a step back from the trade war, the US-China relationship may well be thorny for years to come. Investors should focus on the potential implications for their investment portfolios.

US Targets Chinese Companies

In late April, Chinese stocks began to make headlines in the US. The US Securities and Exchange Commission published a statement warning that Chinese companies could not be relied upon to provide transparent reports. Investors who are harmed by disclosure failures would have “substantially less access to recourse, in comparison to US domestic companies,” the SEC said.

Less than a month later, the US federal government retirement fund stopped plans to invest in Chinese companies. And on May 20, the Senate passed a bill that would bar foreign companies from US exchanges if they cannot prove that they aren’t controlled by a foreign government and if they do not allow greater US oversight of company financials. While this would only apply if the company isn’t compliant for three years, it could clearly lead to large Chinese companies being delisted from American exchanges. The China Securities Regulatory Commission said on May 24 that Chinese and US regulators have made “continuous efforts” to “enhance audit oversight cooperation” and that the Senate act would hurt both US and Chinese interests if enacted.

Some equity investors with Chinese holdings are concerned. Chinese stocks have become a growing component of international investment portfolios in recent years. MSCI has increased the weights of Chinese onshore stocks in its global and emerging-market indices. MSCI indices have 226 Chinese American depositary receipt (ADR) companies listed with a combined market cap of $966 billion. Shares of major companies that have become global household names, including Alibaba Group and NetEase, suddenly looked vulnerable to forces beyond their control.