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US-China tensions

US blacklists top China chipmaker SMIC and oil giant CNOOC

Move aims to block investment that could benefit Beijing's military

The U.S. has labelled Semiconductor Manufacturing International Co. and China National Offshore Oil Corp. as "Communist Chinese military companies." (Source photos by AP and Reuters)

TAIPEI/HONG KONG -- China's largest contract chipmaker and one of its biggest oil groups have been added to a U.S. blacklist over alleged military ties, escalating Washington-Beijing tensions in the final days of the outgoing Trump administration.

Semiconductor Manufacturing International Co. and China National Offshore Oil Corp. were among the four additions to the U.S. Defense Department's list of "Communist Chinese military companies" on Thursday night.

China Construction Technology Co. Ltd. and China International Engineering Consulting Corp. were also added.

The move comes after President Donald Trump said in an executive order in November that China is increasingly exploiting U.S. capital to enable the development and modernization of its military. The executive order is meant to stop any U.S. capital from going to military-related Chinese companies on the blacklist.

The executive order takes effect on Jan. 11 and prohibits "any United States person" from holding securities, directly or through funds, in companies deemed to have links to China's military. Investors already holding such assets will have until November 2021 to shed them.

SMIC is China's biggest semiconductor company. It delisted from New York last year after being traded in the U.S since 2004, and joined Shanghai's STAR tech board, the country's version of Nasdaq, this summer.

Shares in the Chinese chipmaker also trade in Hong Kong, and several U.S. funds such as the Vanguard Group, BlackRock Institutional Trust Company, Invesco Capital Management and Fidelity Management & Research Company are among its leading investors.

SMIC said on Friday morning in a stock exchange filing that it is aware of the decision from the U.S. Department of Defense and is evaluating the impacts, while warning investors of risks for investment.

Trading in its shares was halted in Hong Kong on Friday morning, but resumed at 1 p.m. The shares closed the day down 5.4%. 

In a separate stock exchange filing, the company said the blacklisting will not materially impact its business and reiterated that it has no links to China's military.

Previously the U.S. Department of Commerce tightened export control regulations on SMIC by asking American suppliers to apply for licenses before shipping any tools or materials to the Chinese company, citing the "unprecedented risk" posed by the company's alleged links to the military.

The three other companies added to the blacklist are all key state-owned conglomerates directly controlled by the State-owned Assets Supervision and Administration Commission of the State Council, or SASAC.

CNOOC, moreover, is one of China's three state oil majors. Hong Kong-listed shares of its majority-owned core unit fell 3.9% during trading Friday, having already shed 18.5% of its value this week after Reuters first reported the blacklisting of its parent company.

The listed unit, which shares the same acronym as its parent, said in a stock exchange filing on Friday that it is "comprehensively assessing the impact of the situation on the Group and will [closely] monitor relevant follow-up developments."

The other two blacklisted companies are important players in the construction sector.

CCTC, formerly China Architecture Design & Research Group, made headlines in 2012 when it purchased CPG Corp. of Singapore. The acquisition of a global construction engineering firm was seen as a new tactic in Beijing's zouchuqu, or "going out," policy to encourage overseas investment.

"This is the first time for China's high-tech services industry to go out and successfully complete an overseas acquisition," Xiu Long, then head of the Chinese company, told reporters at the time. "This is not an opportunistic purchase but part of the national policy to encourage going out and improving international competitiveness."

CIECC, meanwhile, is a key consultant for the central government for decisions on major construction and engineering contracts, both at home and abroad.

CIECC has been involved in key infrastructure projects in China, including the 1,300 km Beijing-Shanghai highspeed railway.    © AFP/Jiji

The company was involved in landmark domestic infrastructure projects, such as the West-East Gas Pipeline connecting Talim Basin in Xinjiang with the outskirts of Shanghai over 4,000km away, and the 1,300km Beijing-Shanghai highspeed railway. Overseas, the company is associated with projects under the Belt and Road Initiative, including Pakistan's Gwadar Port.

CIECC lists the State Administration for Science, Technology and Industry for National Defense among its major clients. The central government organ, under the Ministry of Industry and Information Technology, is in charge of general planning of military technology.

The U.S. blacklist of Chinese companies has continued to grow since last year. In June, the Defense Department added 20 Chinese companies to list, including China's largest telecom operator China Mobile, the world's third-largest server provider Inspur, global No. 1 surveillance camera provider Hikvision, and Huawei.

Last year, the department named China Nuclear Engineering & Construction Corp., the country's research entity for nuclear technology, along with 11 other Chinese entities as alleged military companies.

Harry Clark, a Washington-based lawyer with law firm Orrick, said Washington's prohibition would cover not only U.S citizens and permanent residents but also entities, such as funds, organized under U.S. laws or based in the U.S.

Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, said more clarity on the sanctions is needed.

"Basically, I don't think we should talk about a full-fledged financial decoupling, but I do think that we see targeted financial decoupling," she said. While she does not predict any major impact in the short term, inclusion on the list could hurt a company's ability to make acquisitions abroad, she added.

A more pressing question, according to her, is whether the sanctions will affect the subsidiaries of those Chinese companies. The answer is likely "yes," she said, but "it needs to be fleshed out."

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