News of the American determination to block Chinese foreign investment in key American sectors and companies will, to be sure, provoke a further response from the government of China. Should tensions escalate further, the logical Chinese actions will be to simply block, shut down, or nationalize American flagged companies that have subsidiaries doing business, that have interests in joint ventures, or that have wholly owned subsidiaries in China. This would be entirely in keeping with Chinese past actions with respect to other trade skirmishes China has fought in the past in Asia or Europe; there is no logical reason to believe that American companies will get a pass, no matter how sizeable.
Such risks can seldom be properly modelled by investment firms. Simply put, just how would markets react to the news, for example, of a Chinese decision to strip any American based casino operator that holds licenses and billions of dollars of capital invested in Macao? What would happen to American automakers if China decided to completely shutter, through direct or indirect actions, American automakers that produce vehicles in China?
Luckily, there are certain subgroups, even among multinationals, that do not conduct much, or any, business in China. The first sector that comes to mind are the credit card and payment processors Visa and Mastercard. In the case of both companies, neither firm was permitted to directly process payments on their interchange systems, until quite recently, as a result of longstanding Chinese government policy. The Chinese government decades ago, had a determination to build, through the granting of domestic monopoly status, a domestic and globally competitive player in China Unionpay. Once China Unionpay and online direct processors, including Chinese subsidiaries of Ali Baba and others; once these businesses had taken almost all of the processing transaction in China and had done so for a sufficient period of time that the Chinese citizen would be extremely sticky with their payment processor of choice (sticky meaning unlikely to change their processor), only then did the Chinese government permit the duopoly of Mastercard and Visa to directly enter the market.
Visa (V-NYSE, $132.05) and Mastercard (MA-NYSE, $196.74) have substantial and highly profitable divisions in Asia. However the Chinese divisions are so insignificant in revenues that any Chinese government decision to simply shutter those domestic operations would have, effectively, negligible short term impacts upon the revenues and profits of either companies. This is not to suggest that a breaking news release, tersely issued from a Chinese state agency, indicating that Visa and Mastercard will be barred from conducting further business in the world’s second largest economy, would not result in some immediate stock price fallout. However, investors should always to careful to make investment decisions, whether to buy, to sell or to remain as a holder, of securities based upon the fundamentals of the business and growth prospects, rather than simple knee-jerk reactions to irrelevant reports. Should the trade skirmishes between America and China continue to escalate, it is unlikely that any significant financial fallout for either Visa or Mastercard will ensue.
Simply put, China cannot mete out financial pain on companies that do not conduct significant business in the people’s republic. Even on a go forward basis, very few investment firms have made any meaningful attempt to model forward Chinese revenues in the payment processing sector by Visa or Mastercard; it is well understood that while China talks about opening up markets, it will never happen.