Monday is the deadline for people to disinvest in several Chinese companies. Some people speculate that the Trump administration’s move to cause this divestment may cause a complex and deep conflict with the Chinese Communist Party.
US Secretary of State Mike Pompeo released a statement about China’s use of the “Military-Civil Fusion” being a leading reason for intervention by the Trump administration :
“Its goal is to enable the PRC [Under the Chinese Communist Party] to develop the most technologically advanced military in the world. As the name suggests, a key part of MCF is the elimination of barriers between China’s civilian research and commercial sectors, and it’s military and defense industrial sectors. The CCP is implementing this strategy, not just through its own research and development efforts, but also by acquiring and diverting the world’s cutting-edge technologies – including through theft – to achieve military dominance.”
The Division of Examinations Risk Alert was sent out on Tuesday to remind investment advisers, broker-dealers, and other market participants of a recent action relating to investments in securities associated with Communist Chinese military companies, as laid out in an Executive Order signed by President Donald Trump.
The EO 13959 states that beginning on January 11, 2021, at 9:30 a.m. EST, U.S. persons, which includes both individuals and entities, will be prohibited from transacting in certain securities and derivatives of Communist China military companies (“CCMCs”) unless such transactions are for purposes of divestment and occur through November 11, 2021.
The issuance of EO 13959 also follows calls by a bipartisan group of U.S. Congress members in September 2019 for the U.S. executive branch to “reexamine all the statutory authorities at its disposal to confront the CCP’s strategy of Military-Civil Fusion, including powers that have lain dormant for years.”
One such authority, Section 1237 of the National Defense Authorization Act (NDAA) of FY1999, as amended (“Section 1237”), required the Secretary of Defense to publish a list of persons “operating directly or indirectly in the United States or any of its territories and possessions that are Communist Chinese military companies.
- On November 12, 2020, President Trump issued a new EO prohibiting U.S. persons from engaging in transactions in publicly traded securities of certain CCMCs, or any securities that are derivative of, or are designed to provide investment exposure to, such securities, effective January 11, 2021, at 9:30 a.m. EST.
- On December 28, 2020, OFAC published guidance clarifying the breadth of these prohibitions, including (i) a broad interpretation of the covered financial instruments to include, for instance, derivatives (futures, options, swaps), warrants, ADRs, GDRs, ETFs, index funds and mutual funds, to the extent such instruments fall within the definition of “security” under the EO; (ii) confirmation that the prohibition applies to investments in both U.S. and foreign funds that hold publicly traded securities of CCMCs, regardless of the level of such securities’ share of the underlying fund, ETF or derivative, and regardless of where the securities are traded or in which currency the securities are denominated; and (iii) a statement that the Treasury Department intends to list additional entities that are majority-owned or controlled by listed CCMCs.
- The EO provides a limited exemption allowing U.S. persons to divest their holdings in listed CCMCs within one year from the CCMC’s designation.
- For companies designated as CCMCs after November 12, 2020, restrictions imposed by the EO will go into effect 60 days after the designation, with an exemption allowing for divestments made within 365 days of the designation.
According to the press release of Jan 6th:
Executive Order on Securities Investments that Finance Communist Chinese Military Companies On November 12, 2020, President Trump signed Executive Order 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies” (the “EO”).
The EO states that beginning on January 11, 2021, at 9:30 a.m. EST, U.S. persons, which includes both individuals and entities, will be prohibited from transacting in certain securities and derivatives of Communist China military companies (“CCMCs”) unless such transactions are for purposes of divestment and occur through November 11, 2021.
We encourage firms to review and assess the impact of the EO for their own investments and on behalf of investors and clients and evaluate their related processes. We also encourage firms to continue to review OFAC’s website for additional guidance.
According to the Wikipedia page for the Executive Order, the list of companies is as follows:
Initially, 31 companies were identified, including two companies whose shares are traded on U.S. exchanges. These include companies in the aerospace, shipbuilding, construction, technology, and communication industries.
- Aero Engine Corporation of China
- Aviation Industry Corporation of China
- China Academy of Launch Vehicle Technology
- China Aerospace Science and Technology Corporation
- China Aerospace Science and Industry Corporation
- China Communications Construction Company
- China Electronics Corporation
- China Electronics Technology Group
- China Mobile
- China National Chemical Corporation (ChemChina)
- China National Chemical Engineering
- China National Nuclear Corporation
- China Nuclear Engineering & Construction Corporation (CNECC)
- China General Nuclear Power Group
- China Railway Construction Corporation
- China Shipbuilding Industry Corporation
- China South Industries Group
- China Spacesat
- China State Construction Engineering
- China State Shipbuilding Corporation
- China Telecommunications Corporation
- China Three Gorges Corporation
- China United Network Communications Group (China Unicom)
- CRRC Corporation
- Dawning Information Industry Co. (Sugon)
- China North Industries Group Corporation (Norinco)
- Panda Electronics
On December 3, 2020, the Department of Defense designated four additional companies as owned or controlled by the Chinese military, taking the total number of affected companies to 35.
- Semiconductor Manufacturing International Corporation (SMIC)
- China National Offshore Oil Corporation (CNOOC)
- China Construction Technology
- China International Engineering Consulting Corporation