When US banks such as JPMorgan, Morgan Stanley and Goldman Sachs say they plan to delist hundreds of Hong Kong-listed structured products investors should take their cue to leave.

On Monday, the US executive order banning investment in companies with alleged Chinese military ties went into effect. The 500 structured products targeted by US banks include those linked to sanctioned stocks of telecom operators China Mobile, China Telecom and China Unicom. Derivatives on Hong Kong’s benchmark Hang Seng index are also on the list.

A vast portfolio rebalancing is being triggered by the still hazy US sanctions. Foreign investors were a key driving force in last year’s rally in Hong Kong and mainland listed Chinese stocks. A sell-off by global passive index funds is now expected.

Take US asset manager State Street Global Advisors, which runs the $14bn Hong Kong tracker fund. The most actively traded exchange-traded product in Hong Kong has declared that it will not make any further investments in sanctioned stocks.

So far, just three of the 35 Chinese companies on the US blacklist have been forced to delist. More are expected. Hong Kong’s index provider — which has more than $35bn linked to its indices — has not yet removed the sanctioned shares but it is under pressure to do so. Any changes will trigger further sell-offs.

In the meantime, investments from bargain-hunting mainland Chinese funds will ameliorate some of the declines. China Mobile was the most purchased stock in Hong Kong by mainland investors on Friday. Investors also bought a net Rmb18.9bn ($2.9bn) worth of Hong Kong stocks on Monday. But this will not fully offset funds lost from overseas investors longer term.

All this underscores concerns that Hong Kong is losing its status as an Asian trading hub. The city has already lost overseas standing due to political unrest and Beijing’s sweeping national security law. The added risk of losing index hedging tools amid increased market volatility will only drive capital away from Hong Kong’s securities markets.

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