The potential moves, which could dramatically escalate U.S.-China trade tensions, would be aimed at limiting the flow of U.S. capital to Chinese companies due to growing security concerns about their activities, according to a source who was briefed on the deliberations.
It remained unclear on Friday how this would be achieved, but it had an immediate jarring impact on trading.
Shares of Hangzhou, Zhejiang-based Alibaba ended down 5.15% at $165.98. JD.com fell 5.95% to $27.82 and Baidu Inc declined 3.67% to $101.21. The iShares China Large-Cap ETF shed 1.15%.
Index providers, which have ratcheted up their exposure to Chinese shares in recent years, also lost ground, with MSCI Inc dropping 3.43 to $215.89 and S&P Global Inc down 3.77% to $246.35.
Shares of New York Stock Exchange-owner Intercontinental Exchange Inc ended down 1.88% at $92.40 and shares of Nasdaq Inc declined 1.70% to $100.08.
"One critical quality of our capital markets is that we provide non-discriminatory and fair access to all eligible companies," said Nasdaq spokesman Allan Schoenberg. "The statutory obligation of all U.S. equity exchanges to do so creates a vibrant market that provides diverse investment opportunities for U.S. investors."
NYSE declined to comment, as did S&P Global and London Stock Exchange-owned FTSE Russell. MSCI did not immediately respond to requests for comment.
The share price declines were likely the result of knee-jerk reactions by retail investors, rather than institutional investors expecting any imminent changes, said an executive at a U.S. exchange.
It was unclear what mechanisms the U.S. government could use to achieve its goals, several sources said.
Delistings from U.S. exchanges could potentially be achieved through U.S. Securities and Exchange Commission reviews, or through SEC rule-making tied to protecting American investors, the sources said.
Other actions, like prohibiting pension investments in index funds that include Chinese stocks could require U.S. President Donald Trump to declare a national emergency and invoke the International Emergency Economic Powers Act. The administration also may be able to work with Congress on legislation to limit such investments, one of the sources said.
Tensions around Chinese listings on U.S. exchanges have been building since 2011 when scores of Chinese companies trading in the United States were accused on accounting irregularities.
In June, a bipartisan group of U.S. lawmakers introduced a bill to force Chinese companies listed on American stock exchanges to submit to regulatory oversight, including providing access to audits or face delisting.
Last year the SEC and the Public Company Accounting Oversight Board (PCAOB) issued a warning to investors about the difficulties U.S. regulators faced in inspecting the audit work and practices of auditing firms in China that examine U.S.-listed Chinese companies.
(Reporting by Chuck Mikolajczak and John McCrank in New York; Andrea Shalal and David Lawder in Washington DC; Editing by Rosalba O'Brien and Tom Brown)
By Chuck Mikolajczak and John McCrank
