Trump Administration bolsters executive order barring U.S. investment in Chinese companies

In a significant development, the Trump administration has further bolstered an executive order barring U.S. investors from purchasing securities of Chinese military-controlled companies. There is some disagreement among U.S. agencies on how tough to make the directive.

In a statement, the Treasury Department published guidance clarifying that the executive order, released in November, would apply to investors in exchange-traded funds, index funds as well as subsidiaries of Chinese companies which have been designated as owned or controlled by the Chinese military.

The U.S. Treasury posted a “frequently asked questions” on its website following news reports of a raging debate within the Trump Administration over the guidance. The Department of Defense and the State Department have pushed back against a bid by the Treasury Department to water down the executive order, said a source.

In a statement U.S. Secretary of State Mike Pompeo said, the announcement “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. This should allay concerns that U.S. investors might unknowingly support (Chinese military-controlled companies) via direct, indirect, or other passive investments”.

The new guidance increases the lucidity and specifically mentions that the prohibitions appiies to “any subsidiary of a Communist Chinese military company, after such subsidiary is publicly listed by Treasury.”

The Treasury Department “intends to list” publicly traded entities that are 50% or more owned by a Chinese military company or controlled by one.

“Treasury’s published FAQ 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,” said Roger Robinson, a former White House official who supports curbing Chinese access to U.S. investors.

The earlier executive order sought to give teeth to a 1999 law that mandated that the Department of Defense compile a list of Chinese military companies, which the Pentagon complied with only this year. So far 35 companies, including oil company CNOOC Ltd and China’s top chipmaker, Semiconductor Manufacturing International Corp form part of the list.

Since the first executive order in November, U.S. stock exchanges have begun delisting some of the designated companies from their indexes.

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