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Executive Order Prohibiting Investment in Chinese “Military Companies”: Key Points, Context

Author: Hdeel Abdehady

President Trump on November 12, 2020 issued the Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies. We provide a brief analysis of key provisions and context.

Prohibitions in Securities and Investment in “Communist Chinese Military Companies”

  • Transactions in securities, in derivatives of such securities, or designed to provide investment exposure to publicly traded securities of companies designated as “Communist Chinese Military Companies” under NDAA FY 19 (Public Law No. 105-261, as amended) are prohibited starting on Jan. 11, 2021 at 9:30 am EST (stock market open). Examples of currently designated companies are Huawei (not publicly traded) and Hikvision (publicly traded). Persons obligated to comply with the prohibition who, as of Jan. 11, 2021 at 9:30 a.m. EST held or had interests in or investment exposure to targeted securities, will have until Nov. 21, 2021 to engage in otherwise prohibited transactions, solely to divest.
  • Transactions in securities of companies that are, after Jan. 11, 2021 at 9:30 a.m. EST, designated as “Communist Chinese military companies” will be prohibited on the date that is 60 days after a company is designated. Parties holding securities (or interests in derivative transactions or investment exposure) will have one year from the date of the designation to engage in otherwise prohibited transactions, solely to divest.
  • The prohibitions on securities and related transactions apply to U.S. persons (citizens, lawful permanent residents, and foreign persons while in the territory of the United States), any entity organized in the United States or under U.S. laws (including, e.g., foreign-headquartered entities), and the foreign branches of U.S. entities (this includes foreign branches of, e.g., U.S. securities brokers and investment banks, such as in Hong Kong or Singapore.

Scope of the Order Open to Question

  • The scope of this Executive order needs to be understood. The order prohibits “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities” (§ 1(a)(i)-(ii)). The meaning and intended scope of “designed to provide investment exposure” is not clear. For example, is the provision of advice or transaction support—legal or other—“designed to provide investment exposure,” or that incidentally or indirectly (not by design) results in such exposure, prohibited?

Context and Comments

  • The Executive order should not be too surprising to parties who have followed the Trump Administration’s stated plans and the legislative agendas of some Congress members, particularly members of the Republican party known as “China hawks.” For example, some Trump Administration officials in the last year or so floated the idea of a broader ban on investment in Chinese companies. Under pressure from the Trump Administration and some Congress members, the Federal Retirement Thrift Supervision Board earlier this year halted plans to invest federal employees’ retirement funds in an index fund that included Chinese investments. Investments in specific Chinese companies, such as Hikvision and life sciences companies, implicated in China’s surveillance and suppression of China’s Uighur Muslims in Xinjiang have been scrutinized, leading some U.S. companies to terminate investments or relationships in response. Some Trump Administration officials and Congress members have also advocated for further “decoupling” by prohibiting certain Chinese company listings on U.S. exchanges.
  • The Executive order’s prohibitions on publicly traded securities in “Communist Chinese Military Companies” become operable, at the earliest, on Jan.11, 2021, nine days before the next president, President-elect Biden, takes office. It remains to be seen if the incoming president will retain or revoke the Executive order, or take other steps. We expect that with respect to U.S.-China trade and emerging technologies disputes and competition, the Biden Administration will take a more comprehensive, coordinated, and multilateral approach, relying more on joint action or shared objectives with Congress (where there is bipartisan consensus on key China matters) and U.S. allies, particularly in Europe and Asia. That said, the proximity of Jan. 11, 2021 to the start of the next president’s term will likely cause the incoming administration to ensure that any departures from the Executive order are framed in a compelling policy terms, so as to, at minimum, blunt or preempt claims from some quarters that the next president is “soft on China.”

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