Biden’s China blacklist revamp leaves him lots of wiggle room

At first glance, U.S. President Joe Biden’s plans to revamp a Trump-era ban on investing in certain Chinese companies could put potentially thousands of additional firms at risk. In reality, the impact will hinge on the overall state of ties between the world’s biggest economies.

Under Biden’s amended order, expected to be signed later this week, the investment ban will no longer be linked to a U.S. Defense Department report on companies owned or controlled by China’s military, which had been challenged in court. Instead, the Treasury Department will create a list of companies that could face financial penalties for their connection to China’s defense and surveillance technology sectors, Bloomberg News reported Wednesday.

So far, it’s unclear how exactly American officials will decide which companies to target within those broad groups. A person familiar with the situation said the administration would keep a large number of previously listed entities, while Treasury’s Office of Foreign Assets Control will add others.

But they also signaled a narrowing of the scope in one key area: The White House and Treasury planned to clarify that the prohibitions apply to subsidiaries of listed companies only if that subsidiary is itself listed by Treasury. The previous administration aimed to also capture those companies whose names closely match the listed entities.

Those somewhat mixed signals—a wider universe of companies affected coupled with clearer rules on how they are impacted—effectively gives Biden lots of latitude on how the new order is implemented. And ultimately that will hinge on the overall state of U.S.-China relations, which are showing some signs of stabilizing even as they compete fiercely in a wide range of areas.

This week, Treasury Secretary Janet Yellen, who will be tasked with coming up with the list, held her first call with Vice Premier Liu He, a top Chinese economic official who also recently held discussions with U.S. Trade Representative Katherine Tai. The Chinese Commerce Ministry on Thursday called the meetings “professional, candid and constructive” while saying the countries had “many areas for cooperation.”

“This is by no means a restoration of normal exchanges between two governments, but the situation is much better than in Anchorage,” said Shi Yinhong, director of Renmin University’s Center on American Studies in Beijing, referring to a public spat in a meeting of top diplomats from both sides back in March.

“Liu’s calls should not be read as a sign that the economic ties are improving—further deterioration is possible,” Shi added. “But talk is definitely better than no talk.”

Biden’s move to revamp the blacklist comes ahead of a June 11 deadline for new U.S. investments in Chinese companies identified under former President Donald Trump’s executive order in November 2020. Two companies—Xiaomi Corp. and Luokung Technology Corp.—successfully challenged the order in court, adding further impetus for Biden to overhaul the policy.

China stocks on Thursday closed lower after drifting between gains and losses as investors digested Biden’s plans. Some defense and aerospace stocks fell, including AECC Aviation Power Co. and AVIC Jonhon Optronic Technology Co.

“The first impression is that the amending of the list may include more names in a greater variety of industries,” said Gary Ching, vice president of research department at Guosen Securities (HK). “There could be concerns about other companies like Xiaomi, which investors don’t commonly or immediately associate with the military, those who don’t fall into a black-and-white definition of military ties. This shows that Biden administration is using vague and unforeseen tactics with China.”

Xiaomi, which gained 2.4% in Hong Kong on Thursday, will be a key test case for how Biden will implement the new order given it was already removed from Trump’s blacklist. It’s likely others already sanctioned, including Aviation Industry Corporation of China, or AVIC, the biggest and best known maker of aircraft and weapons, will remain on the list.

The addition of surveillance equipment would open the door to penalties on a dizzying range of private companies beyond Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co., which make surveillance cameras and facial recognition technology and already blacklisted. Two of the country’s most promising startups, SenseTime Group Ltd. and Megvii Technology Ltd., develop artificial intelligence technologies that have also been used to track people.

Perhaps the biggest question is whether the Biden administration will use an expansive definition of surveillance that includes companies cooperating with the Communist Party. That could encompass virtually every major technology player, since they are obligated by law to censor and share data as requested by the party.

For example, Tencent Holdings Ltd.—the most valuable company in China—operates the ubiquitous WeChat messaging service, which authorities use in police investigations and other formal inquiries.

Chinese Foreign Ministry spokesman Wang Wenbin said Thursday the U.S. should respect the rule of law and correct its mistakes. The ban “harms the legal rights and interests of the Chinese companies and also the interests of global investors, including the American ones,” he said at a regular press briefing in Beijing.

“We will take measures to firmly uphold the interests of Chinese companies,” Wang said.

President Xi Jinping’s government has already started preparing for the worst, outlining plans to invest heavily in chip production to become self-sufficient in modern technologies even as he rails against those pushing for economic decoupling. U.S. investment banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among foreign financial services companies expanding in China after it began allowing full ownership last year.

The Biden order suggests he will build stronger barriers in certain core technology while narrowing the scope of targets, according to Li Wei, professor at Renmin University’s School of International Studies.

“The Biden administration is implementing the ‘small yard, high wall’ strategy,” said Li, who writes about U.S.-China strategic competition. “The future technology competition between China and the United States will become increasingly fierce.”