US Defense Department blacklists nine more Chinese companies with alleged military links
On January 14, 2021, the Department of Defense announced the addition of nine names to an ongoing list of “‘Communist Chinese military companies’” operating directly or indirectly in the United States.” These are companies that are known to be or are suspected of working with the Chinese military, often under cover of being consumer-oriented concerns with no military involvement.
The companies that were added to the Pentagon’s blacklist are: Advanced Micro-Fabrication Equipment Inc., Luokong Technology Corporation, Xiaomi Corporation, Beijing Zhongguancun Development Investment Center, GOWIN Semiconductor Corp, Grand China Air Co. Ltd., Global Tone Communication Technology Co. Ltd., China National Aviation Holding Co. Ltd. and Commercial Aircraft Corporation of China, Ltd.
The Department of Defense has explained that it is determined to highlight and counter the People’s Republic of China’s (PRC) Military-Civil Fusion development strategy, which supports the modernization goals of the People’s Liberation Army (PLA) by ensuring its access to advanced technologies and expertise acquired and developed by even those PRC companies, universities, and research programs that appear to be civilian entities.
The companies on the Pentagon’s list become subject to an executive order signed by then-president Donald Trump on November 12, 2020. The order is founded on the idea
that the People’s Republic of China (PRC) is increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses.
The executive order, in language stronger than that employed by the Pentagon, elaborates further:
Key to the development of the PRC’s military, intelligence, and other security apparatuses is the country’s large, ostensibly private economy. Through the national strategy of Military-Civil Fusion, the PRC increases the size of the country’s military-industrial complex by compelling civilian Chinese companies to support its military and intelligence activities. Those companies, though remaining ostensibly private and civilian, directly support the PRC’s military, intelligence, and security apparatuses and aid in their development and modernization.
That said, the crux of the issue as far as the United States is concerned is that
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.
All financial transactions with blacklisted companies must cease within 60 days of their addition to the list, except for divestiture, which must take place within a year of a company’s appearance on the Pentagon’s list.
The blacklist now includes some 40 companies that, for the most part, specialize in aerospace, shipbuilding, chemicals, telecommunications, construction, and other forms of infrastructure. An exception is phone-making giant Huawei, which has been on the list since its inception. Although best known as the world’s second-largest manufacturer of smartphones, Huawei also builds large-scale telecommunications equipment, some of which is in use in the United States.
Among the companies just added to the blacklist is another smartphone manufacturer, Xiaomi, for which the blacklisting of Huawei was a huge stroke of luck. Xiaomi’s stock soared 227% in 2020, and it became the third-largest purveyor of smartphones in the world, with sales exceeding those of Apple. Upon announcement of its blacklisting, shares of Xiaomi dropped 10.3% in Hong Kong trading, reducing its market capitalization by more than $10 billion.
In a statement sent to The Verge, Xiaomi maintained that it was “operating in compliance with the relevant laws and regulations of jurisdictions where it conducts its businesses” and that it “is not owned, controlled or affiliated with the Chinese military, and is not a ‘Communist Chinese Military Company’ defined under the NDAA [National Defense Authorization Act].”
Note that the Pentagon’s blacklist is not to be confused with the Department of Commerce’s Entity List that was created
to include entities that engaged in "activities sanctioned by the State Department and activities contrary to U.S. national security and/or foreign policy interests.”
The Entity List requires licenses for the export of certain items to companies on the list, particularly technology. The top three countries on the list are Russia, China and United Arab Emirates, so, unlike the Pentagon’s list, the Commerce Department’s blacklist does not target Chinese companies exclusively. Huawei has been on the Entity List since 2019; for the moment it has yet to be joined there by Xiaomi.
Although the Biden administration has already reversed a large number of executive orders signed by former president Trump, there is little expectation that the new administration will substantially alter its predecessor’s policy on Chinese companies with suspected military involvement.
