Chinese Military Firms Challenge Pentagon to Reverse Trump’s Investment Ban

May 31, 2021 Updated: June 3, 2021

WASHINGTON—A Chinese smartphone maker won a key legal victory against the U.S. government this spring, which is expected to embolden more Chinese companies with military ties to challenge a Trump-era ban that prohibited U.S. investors from investing in their firms.

The Department of Defense in May officially removed China’s Xiaomi, the world’s third-largest smartphone vendor, from its investment blacklist. Xiaomi was among the 44 companies labeled as “Communist Chinese military companies” (CCMCs) by the Pentagon.

The Defense Department under the Trump administration had designated the company as having ties to China’s military on Jan. 14. In response, Xiaomi filed a lawsuit against the U.S. government in the District Court for the District of Columbia, calling its placement “unlawful and unconstitutional.”

In March, U.S. District Judge Rudolph Contreras ordered a temporary halt to the enforcement of the blacklisting, citing a lack of “substantial evidence” about the company’s ties to the People’s Liberation Army (PLA). The Biden administration didn’t challenge the ruling.

On May 5, the same judge ordered a similar halt preventing the Pentagon from enforcing the ban on Luokung Technology Corp., another Chinese company that was designated as a CCMC. Luokung is a mapping and big data processing technology company headquartered in Beijing.

Following the rulings, FTSE Russell, a leading global index provider, announced that it would add Xiaomi and Luokung back to its global indexes. Securities of many Chinese companies are included in exchange-traded funds (ETFs) and other passive investment funds benchmarked against global indexes like FTSE Russell.

Nasdaq also withdrew its decision to delist the shares of Luokung on May 6. The ruling and listing news sent shares of Luokung Technology—Nasdaq: LKCO—more than 10 percent higher on the same day.

Shares of Xiaomi Corp.—HKG:1810—in Hong Kong fell almost 40 percent, losing roughly $39 billion in market value in two months after the company was placed on the blacklist. However, the shares recovered most of the loss since the court ruling in March.

According to Keith Krach, a Silicon Valley veteran and former undersecretary of state, Xiaomi has been a crucial company to the surveillance state of the Chinese Communist Party (CCP).

“General Secretary Xi uses military-backed companies like Baidu, Tencent, Alibaba, and Xiaomi to grow CCP’s influence while dangerously abandoning global technology trust standards,” he told The Epoch Times.

Krach launched the State Department’s “Clean Network” campaign last year to boot Huawei and other Chinese companies out of critical telecommunications infrastructure in more than 50 countries.

Krach said the Biden administration should continue the campaign against Chinese companies like Xiaomi and “rally our strategic partners worldwide to build trust and security into technology networks.”

According to Republican lawmakers, Xiaomi is the “next Huawei” that seeks to compromise the U.S. information and communications technology supply chain.

In a letter sent to Homeland Security Secretary Alejandro Mayorkas and Commerce Secretary Gina Raimondo in April, New York Republican lawmakers Reps. John Katko and Andrew Garbarino warned the Biden administration against the new and emerging Chinese companies.

“Specifically, we are alarmed at the rise of Chinese technology company Xiaomi, which has recently launched several new high-end smartphones aiming to fill the consumer-facing void left by Huawei,” the lawmakers wrote, urging the administration to present their “response to the threat of emergent market players like Xiaomi.”

Military-Civil Fusion

The Chinese regime, through its aggressive national strategy called “Military-Civil Fusion,” uses Chinese companies to strengthen its military. Under Chinese law, these companies are forced to share their technology with the PLA.

Many of these companies are publicly traded on stock exchanges around the world and are tracked by major indexes such as MSCI and FTSE.

In an effort to curb Beijing’s access to lucrative U.S. capital markets, former President Donald Trump signed an executive order last year that banned U.S. investors from investing in these companies.

Following the court rulings, other blacklisted Chinese companies could go through the same legal route and challenge enforcement of the blacklisting, according to Nazak Nikakhtar, partner at law firm Wiley Rein LLP and former assistant secretary at the U.S. Department of Commerce.

“The litigation risk could have been avoided,” she told The Epoch Times during an interview in April.

It’s a known fact that the Chinese regime, through its Military-Civil Fusion strategy and other national security laws, uses Chinese companies to help strengthen the PLA, and therefore Congress should consider amending the defense policy bill to apply “a de jure approach, rather than a de facto approach, for designating CCMCs,” Nikakhtar said.

This more flexible approach would reduce the burden on the Pentagon to provide sufficient facts about Chinese military companies and reduce litigation risk for the government, she noted.

Government attorney Joseph Evan Borson said that the Biden administration is weighing options on how to prevent legal challenges by the Chinese firms, according to an article by Politico.

“The government is considering its options,” Borson said in May in response to a question by Judge Contreras, who ruled on both Xiaomi and Luokung cases.

“We are considering how to respond in light of the issues that this court’s rulings have raised.”

Follow Emel on Twitter: @mlakan