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Chinese companies shrug off Biden move to extend US blacklist

Analysts warn hawkish stance may hinder Wall Street banks' rush into China

Most of the 59 companies in the new U.S. blacklist are state-owned enterprises in areas where China is working to challenge U.S. supremacy. (Nikkei montage/AP)

HONG KONG/ TAIPEI -- Investors on Friday shrugged off U.S. President Joe Biden's blacklisting of 59 Chinese companies, even as analysts described the move as a "more enforceable" extension of a Trump-era ban on U.S. investment in military-linked entities.

Biden's move also drew warnings that it could hinder American banks' attempt to break into the world's second-biggest economy as it opens up its capital markets.

Shares of most of the listed companies that were included on Thursday's blacklist rose in mainland markets, including Zhonghang Electronic Measuring Instruments, a maker of electronic measurement equipment and sensors for the military. Hangzhou Hikvision Digital Technology, the world's biggest maker of surveillance cameras, also climbed. The company, like most others on the list, was previously included on a similar investment blacklist by then-President Donald Trump in 2020.

The CSI 300 index, which counts the largest shares listed in Shanghai and Shenzhen, was up 0.5%, while the Hang Seng China Enterprises Index, which reflects the overall performance of mainland securities listed in Hong Kong, fell 0.2%

"For investors, the expansion of the list is not a surprise by itself given U.S. moves to contain the rise of China," said Hao Hong, head of research at Bocom International. "Besides, some of these companies are trading at attractive valuations after the recent sell-off in Chinese equities. However, the longer-term impact from a deteriorating relationship between the two nations is the worry now."

Biden signed an executive order on Thursday prohibiting investment in 59 Chinese companies, including telecom equipment maker Huawei and Semiconductor Manufacturing International Corp. The U.S. claims these companies have ties to the Chinese military or sell surveillance technology for use against religious minorities and dissidents.

The ban on new investments will take effect on Aug. 2, and investors have one year to fully divest existing shareholdings.

All but 12 companies were included in the similar executive order by Trump. That order, however, sowed confusion in financial markets, as it came with little guidance on how it would be implemented. U.S. courts later ruled that the government had not provided sufficient evidence in some cases -- such as that of smartphone maker Xiaomi -- to justify putting the company on the list.

"While maintaining the thrust of the Trump-era policy and expanding it somewhat, the revised executive order is clearer and addresses many of the problem areas in the old executive order," said Nicholas Turner, a Hong Kong-based lawyer at Steptoe and Johnson. "With fewer gaps, it also appears to be more enforceable."

Most of the 59 companies are state-owned enterprises related to military engineering, navigation, space, aviation, rocket and satellite technologies -- areas that China is working to build up to challenge U.S. supremacy.

Gen. Kenneth Wilsbach, U.S. Pacific Air Force commander, told reporters at an online news briefing on Friday that he was "happy" to see Biden expand the list of Chinese military-related companies, saying it "highlights the way the Chinese Communist Party does business in China, and that businesses in some way or [other] ultimately work for the party."

Ten of the 12 additions to the blacklist are traded on either the Shanghai or Shenzhen stock markets. Two -- Proven Glory Capital and Proven Honour Capital -- are investment arms of Huawei.

Several additions are military-related. Inner Mongolia First Machinery Group specializes in research and production of military products, while Shannxi Zhongtian Rocket Technology and Zhonghang Electronic Measuring Instrument develop and supply rocket technology, advanced materials and aviation measurement systems to the Chinese military.

Alex Capri, research fellow at the Hinrich Foundation, told Nikkei Asia that the Biden administration's latest move is a clear warning of a strategic decoupling in the financial sector. "Although most of the latest blacklist relates to military and aerospace technologies, the larger challenge involves China's military-civil fusion initiative," he said.

Such a decoupling could jeopardize moves by banks such as Goldman Sachs, JPMorgan and Bank of America to plow billions into the $50 trillion mainland financial markets, which are being opened up to global players. The banks are increasing their balance sheet exposure to mainland clients, moving to take full control of their Chinese securities, advisory and wealth management joint ventures, and hiring thousands of new employees.

The investment ban, moreover, would force American banks in China to steer clear of not only those companies but also any associated entities. Ownership and business relationships, however, are not always easy to determine, Capri said. 

"It's very difficult in China's opaque system."

Additional reporting by Kenji Kawase

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