The US Treasury department is attempting to water down an executive order from Donald Trump that bars Americans from investing in Chinese companies with suspected ties to Beijing’s military.
The effort has been met with furious opposition from the Pentagon and state department, opening up a heated dispute over one of the last big anti-Beijing policies of the Trump era.
Mr Trump last month issued an order barring US investors from investing in Chinese companies that the Pentagon put on a list of groups suspected of helping the Chinese People’s Liberation Army.
The effort is part of a broad push to counter China’s “military-civil fusion” strategy which compels Chinese companies to share technology with the PLA. The Trump administration argues that the strategy means US investors who invest in Chinese companies are helping Beijing and damaging America’s national security.
But many investors have been waiting for guidance from Treasury’s Office of Foreign Assets Control to determine if they need to sell shares in the 35 Chinese companies on the Pentagon list, and their subsidiaries.
Three people familiar with the internal debate said Treasury wanted to exclude Chinese subsidiaries from the ban, but that the effort is being fiercely resisted by the state department and Pentagon, which have argued that not including the subsidiaries would significantly weaken the overall impact of Mr Trump’s order.
The state department and National Security Council declined to comment, while Treasury did not respond to a request for comment.
Mike Pompeo, secretary of state, last week raised concerns about the number of subsidiaries of the blacklisted companies that are included in stock and bond indices. He said the subsidiaries of 24 of the 35 Chinese companies on the Pentagon list were included in a major securities index.
“The money flowing into these index funds . . . supports Chinese companies involved in both civilian and military production,” he said. “Some of these companies produce technologies for the surveillance of civilians and repression of human rights, as is the case with Uyghurs and other Muslim minority groups in Xinjiang, China.”
Mr Pompeo said some of the Chinese companies in the MSCI indices presented “significant national security and humanitarian concerns for the United States” which exposed them to possible US sanctions.
One of the people familiar with the situation said the debate was the last big fight over China inside the Trump administration before the president leaves office on January 20 and is replaced by Joe Biden.
The Pentagon list includes large companies, such as Aviation Industry Corporation of China. But according to the state department, there were at least eight Avic subsidiaries still included in major indices from MSCI and FTSE at the beginning of December. A number of subsidiaries of China Railway Construction Company are also included in the indices from the two providers.
Roger Robinson, a former NSC official who believes the US should take a tougher stance on allowing Chinese companies in its capital markets, said Treasury was trying to dilute the impact of the executive order.
“Treasury is reportedly insisting on narrowing, diluting and otherwise defanging key provisions of the order],” said Mr Robinson, who runs RWR Advisory Group, a risk consultancy. “It appears to demonstrate more interest in protecting Wall Street’s fees and Beijing’s interests than scores of millions of unwitting American retail investors and our national security.”
China hawks frequently accuse Steven Mnuchin, Treasury secretary, of being weak on China due to his efforts to resist some of the more hardline measures proposed during the four years of the Trump administration. His defenders privately say that Mr Mnuchin is adopting a balanced approach that takes into account the effect on the US economy.
After three years of resisting lobbying by his more hawkish officials, Mr Trump recently gave the green light for a string of assertive measures against China as he blamed Beijing for the global spread of Covid-19.
The Financial Times reported earlier this year that the White House had told the Pentagon to publish a list of Chinese companies with alleged ties to the military, which was required under a two-decades old law that was not being complied with.
Congress last week passed a defence spending bill that would require the Pentagon to produce a comprehensive list every year, but Mr Trump has threatened to veto the bill over unreleased measures.
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