1. Home
  2. |Insights
  3. |White House Issues Executive Order Prohibiting Investments that Finance Communist Chinese Military Companies

White House Issues Executive Order Prohibiting Investments that Finance Communist Chinese Military Companies

Client Alert | 5 min read | 11.17.20

On November 12, 2020, the President signed an executive order (the EO) that prohibits any “transaction in publicly traded securities or any securities that are derivative of, or are designed to provide investment exposure to such securities” with companies designated as Communist Chinese military companies. The prohibitions, which go into effect on January 11, 2021, apply to U.S. persons, including foreign branches of U.S. companies. 

The EO prohibits any “transaction” in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities (collectively Covered Investments) with the following companies (Targeted Companies):

  1. Those companies included on the Department of Defense’s (DoD) lists issued on June 12, 2020 and August 28, 2020, pursuant to section 1237 of the 1999 National Defense Authorization Act (1999 NDAA), which directs the agency to identify companies “operating directly or indirectly in the United States or any of its territories and possessions that are Communist Chinese military companies.” Those lists included the telecommunications firms Huawei, China Mobile Communications Group, and China Telecommunications Corp., all of which have been subject to U.S. regulatory action. Prior to the designations this year, the Pentagon had never issued such a report.
  2. Any person identified by the DoD pursuant to section 1237 of the 1999 NDAA in the future. 
  3. Any person that the Secretary of Treasury (a) identifies as meeting the criteria in section 1237(b)(4)(B) of the 1999 NDAA or (b) publicly lists as being a subsidiary of person already determined to be a Communist Chinese military company; and
  4. Any companies identified in the Annex to the EO, which appears to include those companies previously identified by the DoD. 

The EO takes effect on several timelines:

  • January 11, 2021: At 9:30 AM, U.S. persons are prohibited to undertake any “transactions” in Covered Investments with any persons identified in bullet (1) above (i.e., any persons already identified in the DoD lists).
  • November 11, 2021: At 11:59 PM, U.S. person are prohibited to undertake purchases for value or sales solely for the purposes of divesting from any securities held in a person identified in bullet (1) above as of 9:30 AM on January 11, 2021.
  • 60 days from designation: At 9:30 AM, 60 days after any additional person is designated pursuant to bullets (2) or (3) above (i.e., newly designated by either the DoD or Treasury), U.S. persons are prohibited to undertake any “transaction” in a Covered Investment.
  • 365 days from designation: At 11:59 PM 365 days from the date of designation, U.S. person are prohibited to undertake purchases for value or sales solely for the purposes of divesting from any securities held in persons designated in bullets (2) or (3) above that were held as of the date that was 60 days from designation.

The EO directs the Secretary of the Treasury in consultation with the Secretaries of State and Defense and the Director of National Intelligence, to promulgate rules and regulations to implement the order under the International Emergency Economic Powers Act (IEEPA). Those regulations may include licensing procedures to authorize transactions that might otherwise be prohibited by the order. Any such licenses must be considered in consultation with the Secretary of State, the Secretary of Defense, and the Director of National Intelligence.

Analysis

Unwitting investors may be affected by the EO as mutual funds and exchange traded funds may have exposure to these companies as “any securities that are derivative of, or are designed to provide investment exposure to such securities.” We expect the Treasury Department to issue further guidance on the diligence necessary to comply with the prohibitions. 

Similarly, the EO as drafted leaves some ambiguity as to whether sales of Covered Investments to non-U.S. persons are prohibited after the restrictions come into effect, given that the EO narrowly defines the term “transaction” to mean only “the purchase for value of any publicly traded security.” The EO’s provisions for divestment of Covered Investments suggests that sales of Covered Investments can only be done through the end of the divestiture period, but the EO does not include a direct prohibition on future sales to non-U.S. persons after that date. Such an allowance seems inconsistent with the intent of the EO, however, and we therefore expect DoD and/or the Treasury to also issue guidance to clarify whether the holding or selling of Covered Investments is also prohibited. 

The order cites the threat posed through the PRC’s “national strategy of Military-Civil Fusion, which compels civilian Chinese companies to support its military and intelligence service,” indirectly referencing China’s 2015 National Security Law, 2016 Cybersecurity Law, 2017 National Intelligence Law, and a recently proposed Personal Information Protection law that would impose restrictions on entities and individuals, including those operating outside of China, that collect and process personal data and sensitive information on subjects in China. Those Chinese-owned companies raise capital “by selling securities to United States investors… [and] lobbying United States index providers and funds to include these securities in market offerings.” Accordingly, the order asserts that U.S. investment in those companies in turn finances the development and modernization of the PRC military.

This order is the latest in a series of actions that have targeted Chinese-owned companies over the past several months. This includes, but is not limited to: (1) expanded export controls (e.g., Entity List designations) of several of the entities on the list; (2) the Clean Network initiative’s targeting of Huawei; (3) recent restrictions by the Federal Communications Commission (FCC) that prohibit the use of universal service funds to purchase Huawei and ZTE equipment; (4) additional action by the FCC regarding several Chinese-owned telecoms, including China Mobile and China Telecom, both of which were named as Communist Chinese military companies on the Department of Defense’s June list; (5) a set of executive orders in August that targeted the mobile applications TikTok and WeChat (the Department of Commerce’s implementing rules have been temporarily enjoined by court order); and (6) the Committee on Foreign Investment in the United States (CFIUS) has blocked several transactions involving Chinese-owned companies as part of a stricter approach towards Chinese investment in the United States. 

Insights

Client Alert | 8 min read | 11.21.24

New Legislation Introduced in Congress Proposes Ending Normal Trade Relations with China and More

On November 14, 2024, Rep. John Moolenaar (R-Mich.), chair of the House Select Committee on the Chinese Communist Party, introduced the Restoring Trade Fairness Act, seeking to suspend China’s Permanent Normal Trade Relations (“PNTR”) status....