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Finally Some Merited Action Against China's 'Cultural Genocide'

Let's hope the blacklisting of eight companies supplying surveillance equipment to the Chinese state is not just another chip on the U.S.-China trade negotiating table.
By ALEX FREW MCMILLAN
Oct 09, 2019 | 12:00 PM EDT
Stocks quotes in this article: BABA, INTC, NVDA, WDC, STX, AMBA

Finally, someone is doing something about China's most-flagrant human rights abuses. And it's the cartoon comedy show "South Park."

I'm kidding. South Park took a stand on China's efforts to expand its censorship overseas with its "Band in China" episode. But actually, the staunchest move has come from the U.S. Commerce Department, which has placed eight Chinese tech companies and 20 public security bureaus on a blacklist barring them from doing business with U.S. counterparts.

Well done. I've written recently that investors have a difficult choice to make surrounding Chinese holdings, particularly state-owned enterprises. The authoritarians in Beijing are doing their best to use corporate power to enforce their wishes in places such as Hong Kong.

Last week, I said I could not believe the world's leaders are just sitting back and doing nothing about the concentration camps that, for two years, have detained more than 1 million ethnic minorities in western China. Besides outright detention, which China presents as voluntary re-education, it has also installed security cameras basically everywhere, required biometric scans, and waged "cultural genocide" to wipe out those cultures and homogenize them with Han Chinese.

So I'm encouraged to see action against the companies that have aided and abetted these abuses. These eight companies all have tight ties with the Chinese state and happily provide their cutting-edge technology to the police state.

The targets include the video surveillance companies Hikvision SZ:002415 and Zhejiang Dahua Technology. The list also includes artificial intelligence and facial recognition companies SenseTime Group and Megvii Technology, the latter of which is backed by Alibaba Group Holding (BABA) .

Megvii, which counts China's Ministry of Public Security among its customers, has been planning to list with an initial public offering (IPO) in Hong Kong. It is reportedly looking to raise at least US$500 million. Goldman Sachs GS now says it is reviewing its role in the IPO in light of the U.S. government action. Citigroup C and J.P. Morgan Chase JPM are also among the IPO sponsors.

The others on the list are Yitu Technologies, voice recognition developer iFlytek, data forensics specialist Xiamen Meiya Pico Information, and nanotechnology maker Yixin Science and Technology Co.

They are now prevented from buying parts from U.S. companies without getting special permission. According to Reuters, which first reported the blacklist, Hikvision and Dahua both use parts from Intel (INTC) , Nvidia (NVDA) , Western Digital (WDC) , Seagate Technology (STX) and Ambarella (AMBA) .

Shares in all of those U.S. companies fell as word of the sanctions came out. None of them have regained lost ground and were drifting south on Wednesday.

The smaller the company, the bigger its losses. Ambarella shares tumbled 13.2% on Tuesday, by some stretch the greatest impact. Seagate lost 4.1%, Western Digital 3.9%, Nvidia 3.8% and Intel 2.1%.

I doubt the U.S. share price action will continue for long. But the blacklist is a big headache for the Chinese companies.

Shenzhen-listed Hikvision has a market value of US$42.3 billion and is the market leader in video surveillance gear. It said on Wednesday that it is reducing its dependence on U.S. chips and parts, but could see a short-term impact from the blacklisting. It said it had been preparing for just such an event for around two years.

The State Department has also placed visa restrictions on executives and officials that it believes are involved. It did not identify those people, but the party secretary of the provincial-level Xinjiang "Uyghur Autonomous Region," Cheng Quanguo, is a member of China's powerful politburo.

The People's Government Public Security Bureau that rules Xinjiang with an iron fist was put on the Commerce Department blacklist. The other 19 bureaus fall under it.

The "Entity List" that now includes the eight Chinese companies and 20 government bureaus is the same restrictive list that includes the mobile phone and telecom equipment maker Huawei Technologies Co.

The "entities have been implicated in human rights violations and abuses in the implementation of China's campaign of repression, mass arbitrary detention, and high-technology surveillance against Uygurs, Kazakhs and other members of Muslim minority groups," the Commerce Department filing stated.

U.S. officials say this is not a bargaining chip in the ongoing trade war with China. I certainly hope it is not. Human rights should not be part of an economic tussle.

Beijing has insisted that the United States must desist and stand on the right side of history -- its version.

"We urge the U.S. side to immediately correct its mistake, withdraw the relevant decision and stop interfering in China's internal affairs," foreign ministry spokesman Geng Shuang said in in a press conference.

As to whether China will retaliate, "stay tuned," Geng warned.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, McMillan had no positions in the stocks mentioned.

TAGS: Investing | Politics | Stocks | Technology | China | Real Money

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