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U.S. Blacklists More Chinese Companies. What It Means for Investors.

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Pedestrians on a Kowloon promenade next to Victoria Harbour in Hong Kong, a special administrative region of China.

ANTHONY WALLACE/AFP via Getty Images

President
Joe Biden
on Thursday blacklisted more Chinese companies from U.S. investment, expanding and clarifying a ban introduced last fall by the Trump administration that was aimed at companies the U.S. said had ties to China’s military complex. The White House said the blacklist was intended to prohibit Chinese defense and surveillance technology firms that might “undermine the security or values of the U.S. and allies” from getting access to U.S. capital, signaling the administration would continue the tougher stance against China.

The Treasury Department’s Office of Foreign Assets Control will update the blacklist as needed, but it now includes 59 companies—up from 44 that were on the blacklist under the Trump administration. Investors have a 60-day grace period and 365 days to divest shares they already own in these companies. The newly added companies are unlikely to be in many U.S. investors’ portfolios, with many privately held. But companies blacklisted by the Trump administration, like

China Mobile

(941. HongKong) and Semiconductor Manufacturing Investment Corp. (688981. China), are still on the list. One company no longer on the blacklist: Smartphone maker Xiaomi (1810. HongKong), which the administration removed last month after a court challenge.

Investors have been waiting to see how the Biden administration would put its mark on U.S.-China relations as China emerges as a more formidable strategic rival and a national security threat. The takeaway: A continued tough stance against China, albeit more nuanced, with the administration clarifying that only named subsidiaries, for example, would be part of the ban. “I would expect to see similar tweaks of other Trump’s measures once the administration has completed its China policy review rather than wholesale removals or lifting of restrictions,” said Owen Tedford, a research analyst at Beacon Policy Advisors.

Clarifications may be welcome by investors still reeling from the confusion created by the first blacklist, which led the New York Stock Exchange to flip-flop and then eventually opt to delist three Chinese telcos, including China Mobile. Many retail investors are stuck in limbo, trying to sell their shares to be in compliance with the order but running into brokerages telling them they can’t execute the trades for them—and offering little additional guidance.

For investors still holding one of these companies, the revised guidance from the Treasury Department says U.S. market makers are allowed to engage in steps needed to divest these shares, including converting American depositary receipts into underlying securities needed to divest a stock. Whether that could give investors stuck with China Mobile shares a way to finally divest them is still unclear. Several brokerage firms didn’t respond immediately to request for comment.

Derek Scissors, a China expert at the American Enterprise Institute who has advocated increased scrutiny of certain outbound investments into China, describes the blacklist as a “necessary first step in a longer journey to stop supporting Chinese entities engaged in harmful activity.” He expects it to have little financial impact on its own.

The

iShares MSCI China ETF

(MCHI) closed down about 2% at $82.01.

More measures could be on the way as the Senate is expected to vote this month on a sweeping China legislative package. Some policy makers have raised concerns about the level of U.S. investment going into China and an amendment calling for increased scrutiny of outbound investments has been floating through Congress. Though policy watchers don’t expect that proposal to make it into the final China package, investors will need to continue monitoring such measures and the continued evolution of the U.S.—China relationship.

Write to Reshma Kapadia at [email protected]

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