Trump Administration Tightens Ban on Investment in Chinese Military Companies

December 29, 2020 Updated: December 29, 2020

WASHINGTON—The Treasury Department on Dec. 28 released guidance for investors about the president’s new executive order that bans investment in companies with ties to the Chinese military. The guidelines clarify that the ban will include subsidiaries of all Chinese firms in the Pentagon’s blacklist, handing a clear win to national security advocates.

The notice came after a conflict reportedly broke out within the administration over how to implement the new order. The Pentagon and the State Department, according to media reports, had objected to Treasury Secretary Steven Mnuchin’s effort to soften the executive order by excluding subsidiaries from the ban list.

Both Mnuchin and State Secretary Mike Pompeo on Twitter denied reports that there was a clash over the issue.

The Treasury Department released a notice that outlined further details for President Donald Trump’s November executive order. The notice said that the prohibitions would “apply to any subsidiary of a Communist Chinese military company.”

The department added that it intends to list publicly traded subsidiaries that are “50 percent or more owned” or “determined to be controlled” by the Chinese military companies identified in the executive order.

In addition, the secretary of defense, in consultation with the secretary of the Treasury, can list an entity if it determines “that an entity, including a subsidiary, is a Communist Chinese military company.”

According to the guidelines, exchange-traded funds (ETFs) and index funds will be subject to the investment ban. The Epoch Times earlier reported that the department had sought to exclude ETFs, another area of disagreement among agencies.

The notice now clarifies that leading passive managers such as BlackRock and Vanguard will be forced to divest blacklisted companies.

Securities of many Chinese companies are embedded in ETFs and other passive investment funds benchmarked against major indexes such as MSCI and FTSE. Billions of U.S. investment dollars have been flowing into Chinese companies and indirectly financing the Chinese regime through these index funds.

Pompeo on Dec. 28 welcomed the Treasury’s announcement on Twitter, hailing the expansion of the investment prohibition.

“President [Donald Trump] is protecting U.S. investors and pension funds,” he wrote. “His Executive Order prohibits ETF and index fund investments in Communist Chinese military companies and subsidiaries. Great teamwork on today’s announcement.”

MSCI Emerging Market index included 19 PLA companies and 53 subsidiaries, according to a Twitter post by Keith Krach, undersecretary of state for economic growth, energy, and the environment.

The executive order, Krach said on Twitter, “prohibits ETFs, mutual funds & index funds, like MSCI, FTSE, Bloomberg & Black Rock, to invest in CCP military co’s & subs. Funds beginning to delist CCMCs [communist Chinese military companies]. Much work ahead.”

The executive order, issued Nov. 12, came in response to rising concerns over pension and retirement fund investments in companies that support the totalitarian regime in China.

The Pentagon so far has designated 35 companies as being “owned or controlled” by the PLA. Many of these companies are publicly traded on stock exchanges around the world, and billions of dollars of U.S. capital have been invested in the bonds and equities of these companies.

Roger Robinson, a former senior national security official under President Ronald Reagan, who supports limiting Chinese access to U.S. capital markets, said these sanctions are “probably the most powerful non-military policy tool presently available to counter Chinese corporate bad actors and their CCP backers.”

“This was a major victory for the American security community at a time of increased peril, which had to overcome formidable internal resistance to achieve this favorable outcome,” he told The Epoch Times.

However, he said, there’s more work to be done.

“If you’re looking for a consistent, unified approach by the Executive Branch to Chinese PLA-linked companies, then it begs the question: What about the Entity List? There are companies listed there that fit the criteria for inclusion on the Pentagon List,” he said, referring to the companies blacklisted by the Commerce Department.

“They are restricted from obtaining U.S. components, technology, and equipment, and yet continue to enjoy unfettered access to our capital markets. These are the kinds of questions that now need to be urgently addressed.”

Christopher Iacovella, CEO of the American Securities Association, said that “needless bureaucracy at the SEC and Treasury continues to limit America’s ability to act quickly.”

“This FAQ, while appreciated, is another example of pointless delay that doesn’t go far enough. Every direct and indirect CCP controlled company must be immediately removed from our markets to protect American investors and the integrity of our markets,” he told The Epoch Times in an email.

The executive order prohibits investment in the stocks or bonds of these military companies beginning Jan. 11, 2021. If U.S. investors have already bought securities in these companies, they have less than a year, until November 2021, to exit their investments, according to the president’s executive order.

Mimi Nguyen Ly contributed to this report.

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