Trump Administration Accelerating Financial Decoupling With China: Experts

Trump Administration Accelerating Financial Decoupling With China: Experts
Investors look at a screen showing stock market movements at a securities company in Hangzhou in China's eastern Zhejiang province on Feb. 3, 2020. (STR/AFP via Getty Images)
Cathy He
President Donald Trump’s recent executive order banning U.S. investments in a group of companies with ties to the Chinese military marks a significant step in accelerating an economic decoupling with the Chinese regime, according to experts.

Many of these companies are publicly traded on stock exchanges around the world. U.S. investors, through their pension funds, could also unwittingly transfer wealth to these entities from the United States.

Starting on Jan. 11, 2021, U.S. companies and individuals will be barred from investing in Chinese-military-linked firms, including 31 companies previously designated by the Pentagon as being “owned or controlled” by China’s People’s Liberation Army (PLA). U.S. investors will be given until Nov. 11, 2021, to divest of investments in those companies.

The companies include prominent technology and manufacturing firms, such as state-run mobile operators China Mobile and China Telecom, rail car manufacturer China Railway Construction Corp. (CRRC), video surveillance manufacturer Hikvision, aerospace firm Aviation Industry Corp. of China (AVIC), defense company Norinco, cloud computing and data-center company Inspur, and chemicals giant Sinochem.

The order, signed on Nov. 12, stated that American investments were helping fund the Chinese regime’s military goals, jeopardizing national security.

“China is increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses,” it stated.

Roger Robinson, president of RWR Advisory Group and former chairman of the congressional U.S.-China Economic and Security Review Commission (USCC), said the move is a “historic first” in imposing penalties on Beijing through capital markets. He added that the order is unlikely to be reversed by subsequent administrations.

“It will no longer be possible to put the genie of capital markets sanctions back in the bottle,” Robinson told The Epoch Times in an email.

The order also allows the defense secretary to designate additional Chinese firms as “Chinese military companies,” significantly increasing the risks for Americans looking to invest in a wide range of Chinese companies, said John Mills, a former senior official at the Office of the Secretary of Defense.

“This puts a shadow over all Chinese companies,” he told The Epoch Times.

Chinese companies are directed by the Chinese Communist Party (CCP) to contribute to the PLA’s development under the doctrine of “military-civil fusion,” which seeks to harness the power of private industry to fuel military modernization.

CRRC, China Telecom, and Inspur have publicly supported China’s military-civil fusion strategy.

Under this doctrine, “essentially everything is an appendage of the CCP,” Mills said. Any Chinese company operating within or outside of China is “in effect an extension of the state.”

“This begs a great question: Why would I want to invest in a Chinese company that really is encumbered by and required to be an extension of the state?”

White House trade adviser Peter Navarro estimated that at least a half-trillion dollars in market capitalization was represented by the 31 Chinese companies and their subsidiaries.

“American capital should not be used to finance the construction of Chinese communist weapons literally aimed at killing Americans and driving the U.S. military out of Asia,” Navarro told reporters in a call on Nov. 12.

Among the 31 companies, many are traded on mainland Chinese or Hong Kong exchanges while two firms, China Mobile and China Telecom, are traded on the New York Stock Exchange.

In recent years, global stock-index providers such as MSCI and FTSE have added Chinese stocks to their global and emerging markets indices, allowing billions of dollars of U.S. investment to flow into Chinese equities.

The MSCI indexes, for instance, include surveillance equipment maker Hikvision. In 2019, the administration placed the firm on a trade blacklist that forbids U.S. companies from doing business with it, over its role in the mass surveillance of Uyghur Muslims in China’s western Xinjiang region.

MSCI also includes Hong Kong-listed AviChina Industry & Technology, the listing company for AVIC. The firm and its subsidiaries develop aircraft and weapons systems for the Chinese military.

While the U.S. administration has piled constraints on economic and trade links with the Chinese regime, citing national security and human rights concerns, the executive order marks the first major action targeting the financial sector.

As of Oct. 2, there were 217 Chinese companies listed on U.S. exchanges, with a total market valuation of $2.2 trillion, according to the USCC.

Earlier this year, the administration blocked the Thrift Savings Plan, the pension fund for federal employees including military personnel, from investing in Chinese equities.

U.S officials have also urged university endowment funds and state pension funds to divest from Chinese holdings.

In August, Treasury Secretary Steven Mnuchin said he expected the Securities and Exchange Commission to adopt a recommendation for Chinese companies on U.S. exchanges that fail to meet auditing requirements by January 2022 to be delisted.

Epoch Times staff member Emel Akan and Reuters contributed to this report.