Expansion of Investment Restrictions on Chinese Military Companies

Good afternoon, this is George Thompson, and today, I’d like to discuss recently-issued Executive Order 14032, which imposes investment restrictions on Chinese military companies.

While this executive order is new, it’s actually an amendment of one issued by the Trump administration.

I’ve commented before on the continuity between the Biden and Trump approaches to trade restrictions, and this is yet another example. Here’s some history. Trump’s Executive Order 13959 was adopted in November 2020.

It has a catchy title, Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies. The way it addressed the supposed threat was by prohibiting U.S. persons from investing in publicly-traded securities of the designated companies.

EO 14032 revises and expands these earlier prohibitions. They will now be effective on August 2, 2021, with a grace period for divestment until June 3, 2022, for current holders to get rid of their shares.

This time period applies to companies listed in the EO’s annex. For restricted companies identified later, there is a 60-day delay between the time of designation and the date the prohibition takes effect.

The new executive order also makes the Treasury Department the lead agency, in place of the Department of Defense.

I’ve gotten a number of questions about the effect of EO 14032, so let me clarify what it covers.

It does not prohibit commercial transactions with the designated Chinese companies, that is to say, the named companies are not Specially Designated Nationals.

It does not impinge upon commercial sales of goods and services, or banking transactions. Its effect is limited to investment activities by U.S. persons in publicly-traded securities and derivatives in the named companies, along with securities designed to provide investment exposure to them.

This makes it pretty far-reaching, since it would include mutual funds, ETFs, and other pooled investments that hold shares of the individual companies.

Note that the usual prohibitions against evasions and facilitation are included in the executive order. U.S. persons can’t use foreign proxies to sidestep the restrictions.

Foreign persons may be accused of violations as well, if they collude in prohibited activities with U.S. persons. All in all, I’d say this is an aggressive expansion of U.S. sanctions against China, and I expect to see more Chinese companies get caught by them.

We’ll keep you up to date as things progress.