President Biden has extended the order banning American investor to invest in certain Chinese linked firm which act as a front end of PRC. The notice from Biden Administration provided for continuation of the order ‘Addressing the threat from Securities Investments that finance certain companies of the People’s Republic of China’. The order deals with Threat arising from Certain Companies of the PRC which raise money from the US investors and use it for advancing Chinese Government Agenda.
Continuation of National Emergency Executive order is in line with the growing border consensus and increasing realisation within Washington, that China is a strategic threat to United States. People’s Republic of China is using its civilian companies for advancing its purpose. Chinese civilian companies raise funds in US Capital market for growth and influence but acts as a front end to PRC. Presidential order highlights that the capital raised by Chinese companies enables the growth and modernisation of Chinese security apparatus and poses threat and challenges to US homeland and its overseas forces.
The ban was introduced during Trump administration, blacklisting 59 companies which included large Chinese companies e.g. Huawei Investments & Holding Co, Huawei Technologies, Semiconductor Manufacturing International Corporation, North Navigation Control Technology, China National Offshore Oil Corp, China Spacesat co., China Avionics System etc are. ADR of China’s big three telecom carriers – China Mobile, China Telecom, and China Unicom have been delisted from NYSE.
According to the order, US persons are prohibited to have exposure in the Chinese linked companies, identified under the order. Us personals cannot through invest (purchase or sale) in publicly traded securities or any other financial instrument linked to securities of such identified firms, put under the ban. As a result, many of the companies will not be able to raise capital from the US Capital markets.
Ban applies to the companies which operates in the defence sector or defence related materiel or in the surveillance technology sector of the economy of the PRC, including firms under direct or indirect ownership or control of PRC. According to the earlier clarification from the US Treasury Department, US investors cannot own ETF of the companies identified under the order.
Various Chinese companies have raised capital and are working on dual usage technology related to quantum computing, Artificial Intelligence, Surveillance systems, space programs etc. These technologies can be used for commercial applications as well as defence advancement. Chinese Government has been extensively extending its AI programs. Chinese Corporations have become one of the largest in the world and have used their financial muscle to acquire and invest in cutting edge US and European Technology. These firms act as a back door for serving the PRC purpose. Huawei is one such example.
Presently, more than two hundred Chinese companies are listed in United States with their cumulative market cap running into trillions of USD. Due to growing trade tensions between US & China, many of the Chinese firms have opted for secondary listing in Hong Kong. Chinese Government is also placing numerous restrictions on raising capital abroad for restricting the transfer of ownership. Chinese firms are structuring the transition as Variable Interest Entities (VIEs), which enables them to raise capital through innovative means but at the same time without transferring the control. Apart from the ban on the identified firm under Presidential order, US Securities and Exchange Commission (SEC) is also taking various measures by tightening its guidelines in relation to complex structured Chinese shell companies, for protecting US investors.
Bureau Galactik Views