U.S. investors now find 59 Chinese companies off limits, on White House orders. President Joe Biden's decision to expand the list of blacklisted companies adjudged to have ties to China's "military-industrial complex" is yet another suggestion that he will maintain the pressure implemented by his predecessor, and even take it further, to greater effect.
Biden on Thursday signed an executive order barring U.S. investors from buying the publicly traded securities of 59 companies that the U.S. government says have military ties. That means they operate in the defense industry, supply materiel to it, or have developed the "surveillance technology sector" in China. The order also covers people who own those companies.
This latest order extends the definition of problematic behavior. It's the first time that surveillance equipment has been covered, and the U.S. government will consider how surveillance technology is used outside China, as well as inside the country. The United States will also consider whether the surveillance technology is used to monitor religious or ethnic minorities, or to facilitate other human rights abuses. By extension, it would cover any authoritarian government using exported Chinese technology to perpetuate abuse.
China has installed the world's most-sophisticated and extensive network of security cameras and screening systems to monitor dissidents, ethnic minorities and Minority Report-style people predicted to soon commit crimes. It also deploys cameras to detect crimes remotely and update its "social-credit" system that attempts to shape model behavior. A friend-of-a-friend was, for instance, denied access to buying a train ticket in China until a commercial legal dispute was settled, making it temporarily impossible to return home from a distant business trip.
Former president Donald Trump signed the original executive order banning U.S. investment into Chinese military companies on November 12 to cover 31 companies. The list was then extended in both December to include four new companies such as chipmaker SMIC (HK:0981) and oil giant CNOOC CEO and in January to cover nine more including Xiaomi (XIACF) , the world's third-largest smartphone maker.
The new list expands the number of companies from 44, although it does make some adjustments to the original roster. The securities-trading ban goes into effect on August 2, or after 60 days from a new company's inclusion on the list. Investors have a year, until June 3, 2022, to complete any trades necessary to divest out of the shares.
Mobile-phone and 5G equipment maker Huawei Technologies as well as the world's largest maker of Artificial Intelligence-driven security cameras, Hangzhou Hikvision Digital Technology (SZ:002415), are the only two companies so far included on the newly added basis of being part of the "surveillance technology sector" of China. There was also no consideration of human rights in the original order.
The order also switches the entity that's in charge of maintaining the military-linked list to the U.S. Treasury Department and its Office of Foreign Assets Control, instead of the U.S. Department of Defense, although they're instructed to cooperate. That and rewording of the original order are both efforts to make the policy more enforceable, after Xiaomi and then mapping-technology company Luokong Technology (LKCO) both successfully challenged their inclusion in U.S. court. Notably, neither of those companies is on the 59-strong list. Another notable omission is COMAC, or the Commercial Aircraft Corp. of China, which counts General Electric (GE) among its suppliers, providing engines for COMAC's passenger jets.
It is particularly apt to consider such abuses today. June 4 is the anniversary of the 1989 Tiananmen Square massacre, when hundreds, possibly thousands, of pro-democracy students were slaughtered by the Chinese military to put down their movement of reform. Nowadays, survivors could also be identified by facial recognition, rounded up and imprisoned at a later date.
This year, just like last year, the Hong Kong government has used COVID-19 restrictions as an excuse to ban the traditional memorial service held in Victoria Park each year. This selective use of the law is increasingly common as a way of cracking down on criticism of the Beijing government. COVID concerns are a smokescreen, completely manufactured as a means of suppressing the demonstration - other government-sanctioned events are going ahead, and the city has now marked 42 straight days without a case of local infection from an unknown source.
The government couldn't care less about the health of any demonstrators. Instead, there are 7,000 Hong Kong police on hand to patrol the area around Victoria Park today, intent on arresting anyone who carries a candle or wears black. The Hong Kong Security Bureau has warned that people can be jailed for five years for violating the ban on the event, or even for promoting it. The prominent lawyer and activist Chow Hang-tung has today been arrested on suspicion of promoting the gathering on her social media accounts. She is vice chair of the group that organizes the rally. Tens of thousands of people peacefully attended the vigil in years past, until it was banned for the first time last year. Who knows if it will ever go ahead again.
Biden's call to examine China's use of military technology to perpetuate human rights abuses could not then come at a more apt moment. Even in previously free Hong Kong, freedom of assembly is disappearing, freedom of expression is banned when it leads to inconvenient results, and pretty much every prominent pro-democracy activist or Beijing critic has been arrested, charged and often imprisoned for a dizzying array of manufactured offenses. The police are lazy, they often rely on the dissidents' own social-media feeds, TV reports or online footage to prosecute cases. Their surveillance expertise pales in comparison to their mainland counterparts but will surely improve.
Participating in unlawful gatherings has been the Hong Kong police state's most popular cudgel with which to beat Beijing's opponents. Nobel Peace Prize nominee Joshua Wong and media mogul Jimmy Lai, publisher of the fiercely pro-democracy tabloid Apple Daily, languish in a prison cell as I write. As soon as they near or achieve release, they are arrested, jailed and imprisoned again. They're political prisoners, held for manufactured offenses that might normally land them a fine.
Similarly, elections for the local congress were put off for a year, ostensibly because of health fears, but in fact because the government was going to lose very badly. Many other nations with far greater populations and geographies have successfully held elections, but this small city of 7.5 million people, with its highly-advanced health system and tech infrastructure, somehow cannot.
Our worst fear here in Hong Kong for the Biden administration is that it will "go easy" on China. So far, so good. The new administration has sustained Trump-era restrictions, expanding them in the case of the initial order restricting investment into Chinese military companies. The Biden administration has also lived true to its pledge to harness international support to curb China's most egregious activity, and to address human rights abuses.
The initial November order spurred a chaotic market response, covering US$500 billion in market cap on U.S. exchanges. It includes China's three enormous telecom companies, China Mobile (CHL) , China Telecom (CHA) and China Unicom (CHU) . The New York Stock Exchange halted trading in their shares on January 11 as instructed in the order, after a flipflop over the move. The companies appealed to stay on the NYSE, and last month the exchange ratified their delisting.
To fulfill the trading ban for U.S. entities, U.S. investment banks Goldman Sachs (GS) , J.P. Morgan (JPM) and Morgan Stanley (MS) have delisted in Hong Kong a combined 500 derivatives listed that include slivers of stock in the blacklisted companies. U.S.-based index providers such as MSCI and Standard & Poor's are struggling to adjust.
The pressure on U.S.-listed Chinese companies will only encourage more of them to de-list from U.S. markets and "come back home," listing in Hong Kong and potentially also China's walled-off domestic markets. Broader U.S. sanctions denying Huawei access to any parts, including semiconductor chips, made with U.S. equipment or technology have had a huge impact - the phone company captured a world-leading market share, selling 20% of the world's smartphones in Q2 2020. The latest figures from Counterpoint Research show that its market share has plummeted to 4%.