WASHINGTON—In his final weeks in office, President Donald Trump and his Cabinet members took swift actions to ban investments in large Chinese companies, a major step in curbing Beijing’s access to lucrative U.S. capital markets.
The administration has banned investing in 44 companies identified by the U.S. Department of Defense as “Communist Chinese military companies.” U.S. investors will have to divest from the securities of these companies and their subsidiaries before the November deadline.
The Pentagon’s blacklist drew Wall Street’s attention when Trump issued an executive order after the election in November 2020 that prohibited investing in companies with ties to the People’s Liberation Army. The order initially covered 31 Chinese companies, including prominent technology and manufacturing firms, such as state-run mobile operators China Mobile and China Telecom, video surveillance manufacturer Hikvision, and aerospace firm Aviation Industry Corp. of China.
Many of these companies are publicly traded on stock exchanges around the world. Through public pension and retirement funds, Americans are transferring wealth from the United States to these firms that directly support China’s military, a problem that has been overlooked for years, according to national security experts.
The investment restriction has also marked the acceleration of an ongoing economic decoupling from China.
Following the executive order, the administration broadened the ban to include subsidiaries of all Chinese firms in the blacklist. The Pentagon also expanded its list to include 13 additional military companies, such as oil giant China National Offshore Oil Corp. (CNOOC), cellphone maker Xiaomi, and semiconductor equipment maker Advanced Micro-Fabrication Equipment (AMEC).
According to a fact sheet released by the State Department, military companies listed under the executive order have more than 1,100 subsidiaries. And dozens of these companies are tracked by MSCI, FTSE, and other indexes.
The State Department, for example, identified 59 military companies, including their subsidiaries tracked by the MSCI emerging market index, one of the most popular benchmarks for investment managers. To date, MSCI dropped only 10 Chinese companies from its index due to the executive order.
While the recent decisions by index providers to remove several Chinese companies are welcoming, those firms “are the tip of an iceberg of more than 1,000 subsidiary companies,” Keith Krach, undersecretary of state for economic growth, energy, and the environment, said in his prepared remarks to the press on Jan. 14.
“As long as these subsidiaries retain access to America’s capital markets, the PRC’s military will continue to be financed on the backs of American workers,” Krach said. “Most Americans have no idea that their own money—held in pension funds, 401Ks, and brokerage accounts—is financing CCP’s military, surveillance state, and human rights abuses through an undisclosed opaque web of subsidiaries, index funds, and financial products.”
The Trump administration initially considered including Chinese tech giants Alibaba, Baidu, and Tencent in the Pentagon’s blacklist, which would have been a big blow to these companies’ stocks. However, after pushback from Treasury Secretary Steven Mnuchin, the idea was abandoned, Reuters reported on Jan. 13.
U.S. entities currently hold Alibaba (BABA) shares in the NYSE worth approximately $183 billion, based on closing prices as of Jan. 14 and latest available public filings data compiled by Bloomberg. On the other hand, Baidu (BIDU) traded on NASDAQ and Tencent (TCEHY) listed on the U.S. over-the-counter market have attracted $32 billion and $6 billion of investments, respectively, from U.S.-domiciled entities.
During a conference call with reporters on Jan. 14, Krach declined to comment on the interagency decision process to exclude these tech giants from the Pentagon’s blacklist but claimed there is ample open-source documentation showing these companies are strategic to the Chinese military.
He also said that there is still important work to be done on continuity of policy in aligning the Pentagon’s list with the Commerce Department’s Entity List, and the Military End User list.
“For example, only 7 of the 44 companies on the DoD list are on the Entity List. In other words, we put export controls on them but then we finance them,” he said.
President-elect Joe Biden made it clear that he would roll back some of Trump’s policies with executive actions in his first days in office. It’s unclear whether Biden will reverse the recent investment bans on Chinese companies.
For now, political analysts don’t expect the Biden administration to lift these restrictions, due to growing bipartisan support to hold China accountable for its trade and human rights records. Last year before the election, Biden came under political pressure to appear tough on the Chinese regime. Approval of China across developed countries plummeted due to Beijing’s initial handling of the coronavirus pandemic and its repression of democracy in Hong Kong and Xinjiang.
Negative opinions about China in the United States have also soared significantly under the Trump administration in the past four years.
To provide more clarity to investors, Trump issued an amended directive on Jan. 13, requiring U.S. investors to completely divest their holdings of securities of blacklisted companies by Nov. 11, 2021.
The amendment also prohibits possession of securities of any Chinese military company one year after the Pentagon puts that company on the blacklist.
In addition, exchange-traded funds and index funds will be subject to the investment ban. U.S. investors will be forced to divest blacklisted companies if they bought the shares overseas through these passive funds.