U.S. blacklist of Chinese companies poses risks for U.S. investors

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People’s Liberation Army soldiers march in a parade to celebrate the 70th anniversary of the People’s Republic of China at Tiananmen Square October 1, 2019 in Beijing, China.
Fu Tian | China Press Service | Visual China Group | Getty Images
SINGAPORE – Large Chinese companies that are essential to Beijing’s global trade and infrastructure projects are under threat as tensions between the United States and China escalate – and that could mean more risk for American investors, according to the TS Lombard research firm.
Last month, US President Donald Trump issued an executive order banning US investments in a list of Chinese companies that Washington says were owned or controlled by the Chinese military. On Monday, Reuters announced that the Trump administration would add China’s leading chipmaker SMIC and oil and gas producer CNOOC to the list.

Following this report, CNOOC shares plunged nearly 14% on Monday, while the minimum wage fell nearly 3% on the same day. Both stocks extended their losses on Tuesday.

The United States is also set to publish a so-called blacklist of 89 Chinese companies with military ties, preventing them from purchasing a range of American products and technologies, according to another Reuters report last week, which cited a separate draft list.

Many of the Chinese companies on the list are at the heart of China’s Belt and Road (BRI) initiative, according to British research firm TS Lombard in a note last week.

The BRI initiative is a massive project that builds a vast network of rail, road and sea tracks stretching from China to Central Asia, Africa and Europe. It also aims to stimulate trade with the countries participating in this initiative.

TS Lombard said that among blacklisted Chinese companies, US investors have the most direct exposure to China Communications Construction Company, China State Construction Group, China Railway Construction Corporation and China Telecommunications.

While large state-owned companies dominate the list, it also includes private companies that have long-standing contracts with the Chinese military or its armed police, such as tech giant Huawei and video surveillance company Hikvision, has declared TS Lombard.

Investors are also waiting for more clarity on how the U.S. decree would apply to listed subsidiaries of blacklisted Chinese state-owned enterprises, the research firm noted.

Investors exposed to more risk

The worrying thing is that China is looking for “synergies” between commercial and military technologies in the long term, TS Lombard said. This means that Chinese private companies are “co-opted in strengthening” the People’s Liberation Army (PLA), the country’s armed forces.

In China’s latest five-year plan announced last month, Beijing reaffirmed the national “urgency” to “consolidate military, political, military and civilian unity” in order to make its national and military defense more effective, TS noted. Lombard.

To that end, this plan outlined the Chinese government’s intention to use technology to disrupt the military’s fighting methods.

“Private sector technology companies are called upon to innovate in technology with the potential to disrupt the status quo of war,” the company said. Some of these technologies include autonomous combat robots and quantum radar communication systems.

The implications are that investors would be exposed to risks that are not immediately obvious – where companies not directly linked to the Chinese military could also potentially be blacklisted by the United States.

“As Beijing intensifies its policy of civil-military integration, the risk for investors is that the United States (responds) with ever broader definitions,” TS Lombard warned. This could mean including entities that supply the Chinese military as well as the armed police – “even if their activities are not military,” the research note said.

Companies that provide food and medical supplies can be included, he said.

Blacklists put Biden in a difficult position

US President-elect Joe Biden would likely want to spend his first six months in office trying to “rebuild” Washington’s relationship with Beijing, said William Reinsch, senior advisor to the Center for Strategic and International Studies think tank.
“I think what you’ll see from Biden… not looking to unravel… but also not looking for new sanctions and new actions, at least in the short term,” he told Squawk Box Asia on Tuesday. From CNBC.

Trump, however, could “make everything worse in the short term” by adding more Chinese companies to the lists before he leaves office, Reinsch said. It “creates a kind of problem” for Biden.

“It would put Biden in a sticky position… I think he will hesitate to add any, but I think he will also be reluctant to remove those that have been added,” he added.

But since the lists were created on the basis of national security, Biden would not want to be accused of being “lenient on China” on security, Reinsch said.

“So that would put it in a little box,” he said.

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