US Issues Guidance on Banned Investment Transactions With Chinese Military Companies

The Treasury and State departments issued guidance on President Donald Trump’s November decision to ban investment in Chinese firms with ties to the country’s military. Treasury issued a list of Chinese military companies and published five new frequently asked questions to offer compliance on the ban, which takes effect Jan. 11, 2021 (see 2011130026).

The executive order and guidance will help ensure U.S. capital does not contribute to Chinese military, intelligence or security services, the State Department said Dec. 28. The agency said the prohibitions in the order apply to “all transactions by U.S. persons,” such as investors, university endowments, banks, index firms and a range of other U.S. entities, including those operating overseas. “This should allay concerns that U.S. investors might unknowingly support [Chinese military companies] via direct, indirect, or other passive investments,” the State Department said.

Treasury’s list, issued Dec. 28, includes more than 30 companies, including several that appear on similar lists published by the Commerce and Defense departments (see 2012220027, 2012040008, 2008300001 and 2006250024), such as Huawei and Semiconductor Manufacturing International Corporation, China’s top chipmaker. The prohibitions in Trump’s executive order will apply to any company or subsidiary of any company listed on Treasury’s list, the agency said in FAQ 857. Treasury said it plans to publicly list subsidiaries that are 50% or more owned by one of the listed companies or that are controlled by one or more Chinese military companies and that issue “publicly traded securities.”

In FAQ 858, Treasury clarified that even if a name of a company on Treasury’s list does not exactly match the “names of issuers of publicly traded securities,” industry should assume the prohibitions apply if the names are closely related. The executive order applies to any entity “with a name that exactly or closely matches the name of an entity” identified in the order and on Treasury's list, the agency said. Treasury will define “publicly traded securities” as securities “denominated in any currency that trade on a securities exchange or through the method of trading that is commonly referred to as ‘over-the-counter,’ in any jurisdiction,” according to FAQ 859.

Treasury also said the ban applies to a range of “financial instruments” involved in transactions with Chinese military companies, including “derivatives” -- such as futures, options and swaps -- and warrants, American depositary receipts, global depositary receipts, exchange-traded funds (ETF), index funds and mutual funds, FAQ 860 said. Treasury stressed the prohibitions apply to transactions in securities “designed to provide investment exposure to such securities,” regardless “of such securities’ share of the underlying index fund, ETF, or derivative thereof,” according to FAQ 861.