The Trump administration has strengthened an executive order that bans U.S. investment in Chinese military companies, according to a notice published by the Treasury Department late on Monday.
The Treasury Department issued a “Frequently Asked Questions” notice that outlines further details for President Donald Trump’s November executive order (E.O.) 13959. The notice said that the Trump administration would prohibit exchange-traded funds (ETFs) and index funds from financing communist Chinese military companies and any subsidiaries that are owned or controlled by the Chinese military.
“[The prohibition] ensures U.S. capital does not contribute to the development and modernization of the People’s Republic of China’s (PRC) military, intelligence, and security services,” Secretary of State Mike Pompeo said in a statement.
The Treasury’s website says that the prohibitions in E.O. 13959 “apply to any subsidiary of a Communist Chinese military company, after such subsidiary is publicly listed by Treasury.”
It says that the Treasury intends to publicly list as subsidiaries “any entity that issues publicly traded securities” and that is “50 percent or more owned by one or more Communist Chinese military company(ies)” or “determined to be controlled by one or more Communist Chinese military company(ies) identified in or pursuant to E.O. 13959.”
It adds that the Secretary of Defense “may determine that an entity, including a subsidiary, is a Communist Chinese military company operating directly or indirectly in the United States or in any of its territories or possessions, and therefore list it as such … until such time as the Secretary of Defense removes such person from such list.”
The Treasury Department also said that its Office of Foreign Assets Control (OFAC) has so far published a list on its website (pdf) that names entities identified in or pursuant to the executive order as communist Chinese military companies (CCMCs), along with additional identifying information.
In a statement, Pompeo said that the executive order “applies to all transactions by U.S. persons, including individuals, institutional investors, pension funds, university endowments, banks, bond issuers, venture capital firms, private equity firms, index firms, and other U.S. entities, including those operating overseas.”
“This should allay concerns that U.S. investors might unknowingly support CCMCs via direct, indirect, or other passive investments including those linked to educational, ETFs, venture funds, private equity, Real Estate Investment Trusts, commodities, endowments, pensions, or any other investment funds tracking bonds, loans, lease lines, debt or equity indices that include securities of CCMCs or subsidiaries publicly listed by the U.S. government,” he added.
“Beginning on January 11, 2021, U.S. investors will no longer be able to transact in publicly traded or private market debt or equity securities, or any securities that are derivative thereof, regardless of the percentage ownership of CCMCs, with full divestment required by November 11, 2021.”
Roger Robinson, a former White House official who supports curbing Chinese access to U.S. investors, told Reuters that the Treasury’s latest FAQ notice “represents a clear victory for the U.S. security community in its determined effort to preserve strong capital markets sanctions associated with [the executive order]—the first of their kind.”
The November executive order (pdf) sought to give teeth to a 1999 law, which mandated that the Department of Defense compile a list of Chinese military companies.
The Pentagon, which only complied with the mandate this year, has so far designated 35 companies—including oil company CNOOC Ltd. and China’s top chipmaker, Semiconductor Manufacturing International Corp—as Chinese military companies operating directly or indirectly in the United States, including those owned or controlled by the People’s Liberation Army (PLA).
The Chinese Communist Party (CCP), through its aggressive national strategy called “Military-Civil Fusion,” uses Chinese companies to strengthen the PLA, Trump’s executive order states.
Secretary of State Mike Pompeo said in a Dec. 8 statement, “Under Xi Jinping, the CCP has prioritized something called ‘military-civil fusion.’ … Chinese companies and researchers must… under penalty of law – share technology with the Chinese military. The goal is to ensure that the People’s Liberation Army has military dominance. And the PLA’s core mission is to sustain the Chinese Communist Party’s grip on power.”
The Pentagon’s list includes companies such as Aviation Industry Corp. of China, Huawei, and Hangzhou Hikvision. Many of the companies on the list are publicly traded on stock exchanges around the world, and millions of U.S. investors, through their pension funds, are unwittingly transferring wealth from the United States to these entities.
The November executive order also noted that the companies, “though remaining ostensibly private and civilian, directly support the PRC’s military, intelligence, and security apparatuses and aid in their development and modernization.”
It adds, “At the same time, those companies raise capital by selling securities to United States investors that trade on public exchanges both here and abroad, lobbying United States index providers and funds to include these securities in market offerings, and engaging in other acts to ensure access to United States capital.
“In that way, the PRC exploits United States investors to finance the development and modernization of its military,” the president warned.
Since the November order, index providers have already begun shedding some of the designated companies from their indexes.
Sen. Marco Rubio (R-Fla.), a notable China hawk, applauded the executive order. In a Nov. 12 statement, he said, “The Chinese Communist Party’s exploitation of U.S. capital markets is a clear and ongoing risk to U.S. economic and national security, and today’s action by the Trump Administration is a welcome start to protecting our markets and investors.
“Importantly, today’s action also lays down a clear marker for U.S. policy going forward—we can never put the interests of the Chinese Communist Party and Wall Street above American workers and mom and pop investors,” he said.