In his last days in office, President Trump has taken a swipe against companies identified by the Department of Defence (DoD) as Communist Chinese military companies by prohibiting US persons from investing in such companies.

On 12 November 2020 Trump declared yet another China-related national emergency and issued an executive order (EO) prohibiting investment by US persons in Communist Chinese military companies identified on the DoD List or subsequently identified by the DoD or the Department of the Treasury as Communist Chinese military companies. The prohibition on investment will take effect on 11 January 2021 at 9:30am Eastern Standard Time (EST), but US persons that wish to divest themselves of the holdings that they have on that date will have until 11 November 2021 to engage in any purchase transactions necessary for divestment. The DoD List, which was initially issued in June 2020 and supplemented in August 2020, highlights companies believed to be entrenched in China's military-civil fusion strategy. The list contains 31 companies that span multiple industries and includes some companies that have been the target of past US government action, including Huawei.

The DoD List stems from a 1998 congressional mandate that required the DoD to publish a list of Communist Chinese military companies operating directly or indirectly in the United States (for further details please see "Pentagon identifies 20 'Communist Chinese military companies'"). The DoD took no action until it received a September 2019 letter from several senators urging it to fulfil this mandate and identify companies for the list.

The EO was issued primarily under the authority of the International Emergency Economic Powers Act (IEEPA) (50 USC 1701).


This EO may be the first of several China-focused actions from the outgoing Trump Administration between now and President Elect Biden's inauguration. Early reports indicate that additional China-related regulatory changes primarily aimed at entrenching the Trump administration's policy towards China and attempting to make it politically difficult for the Biden administration to undo these actions should be expected.

The EO cites China's increasing exploitation of:

United States capital to resource and to enable the development and modernization of its military, intelligence, and other security apparatuses, which continues to allow [China] to directly threaten the United States homeland and United States forces overseas, including by developing and deploying weapons of mass destruction, advanced conventional weapons, and malicious cyber-enabled actions against the United States and its people.

According to the EO, the national security concerns stem from China "exploit[ing] United States investors to finance the development and modernization of its military" through its military-civil fusion policy.

Although the EO targets companies on the DoD List, it further describes such companies as those that:

raise capital by selling securities to United States investors that trade on public exchanges both here and abroad, lobbying United States index providers and funds to include these securities in market offerings, and engaging in other acts to ensure access to United States capital.

Interestingly, the DoD List does not take these factors into account. The DoD List considers only Communist Chinese military companies that operate directly or indirectly in the United States. A 'Communist Chinese military company' is defined in part as a person owned or controlled by the People's Liberation Army (the Chinese military) and engaged in providing commercial services, manufacturing, producing or exporting. This is distinct from the definition of a 'military end-user' under Part 744 of the Export Administration Regulations (EARs), which has a specific definition in Section 744.21(g) of the EARs.

What is prohibited?

After 9:30am EST on 11 January 2021, US persons are prohibited from purchasing for value any publicly traded securities (or any securities that are derivative of or designed to provide investment exposure to such securities) of any identified Communist Chinese military company. A US person that holds securities in a Communist Chinese military company after 11 January 2021 may make purchases for value solely to divest, in whole or in part, from the securities until 11:59pm EST on 11 November 2021. However, the EO does not require divestment.

The Secretary of Defence may identify additional Communist Chinese military companies in the future, and the secretary of the Department of the Treasury may identify subsidiaries of such companies that will also be considered Communist Chinese military companies for the purposes of the EO. US persons will be prohibited from investing in such companies 60 days after a company is identified as a Communist Chinese military company and will have 365 days from the company's identification to engage in any purchase actions necessary to divest (if they choose to divest) investments in such companies that they hold 60 days after identification.

As is typical in IEEPA-based sanctions programmes administered by the Department of the Treasury's Office of Foreign Assets Control (OFAC), the EO defines a 'US person' as any:

  • US citizen;
  • permanent resident alien;
  • entity organised under the laws of the United States or any jurisdiction within the United States (including foreign branches); or
  • person in the United States.

The terms 'security' and 'securities' have the same meaning as in 15 USC §45c(a)(10).

Curiously, and perhaps not intentionally, the EO's definition of 'transaction' – to mean only "the purchase for value of any [publicly] traded security" – significantly restricts the great breadth that such term is normally given in sanctions EOs. With the exception of conspiracies to violate the EO, every prohibition contained in the EO is defined in terms of 'transactions', including transactions that evade, avoid or cause a violation of the EO. How this will play out is yet to be seen, but on its face, the EO might even allow the targeted securities to continue to be traded on US exchanges provided that the buyers are not US persons. It will be interesting to see what FAQs OFAC publishes to explain this.

What will be the effect of this?

Given the increased uncertainty regarding trades of the targeted companies' securities, they are likely to lose value in the short term or at least experience increased trading volatility. However, the EO does not reach or threaten trading by foreign actors, so US investors may simply be replaced by foreign investors. Alternatively, US investors may choose to hold their breath until January 2021 to see what Biden may do, although the new administration is likely to have much more to think about in its first weeks and months than investments in Communist Chinese military companies, and Biden may even choose not to reverse this particular course of action.

What else might be coming?

As the end of the Trump administration presumably approaches, other parting shots at China may emerge. One of these is the issuance of the implementing regulation for the EO that Trump issued on 15 May 2019 on the Information and Communication Technology and Services (ICTS) Supply Chain. In this EO, Trump declared a national emergency regarding the creation and exploitation of vulnerabilities in ICTS. With an eye towards nation-state adversaries, this EO establishes a new interagency framework for technology supply chain screening. It outlines potential restrictions on activities in the United States, such as acquisition, importation, installation or use of ICTS designed or made by companies owned by, controlled by or subject to the jurisdiction or direction of unnamed "foreign adversaries". This new approach could result in significant limits on certain types of foreign-sourced hardware, software and associated services, particularly from Chinese or Russian suppliers. The rule has remained in limbo for nearly one year, after the Commerce Department issued a somewhat vague but far-reaching proposed rule on 26 November 2019.

Another policy move aimed at China could come in the form of the enactment of the bipartisan Holding Foreign Companies Accountable Act (S945). The bill was passed unanimously by the Senate on 20 May 2020 and aims to force the delisting of Chinese companies that refuse to comply with US audit inspection requirements. It would prohibit a company's securities from being listed on any of the US securities exchanges if that company has failed for three consecutive years to meet the requirements of the Public Company Accounting Oversight Board (PCAOB), a non-profit watchdog overseen by the Securities and Exchange Commission (SEC) and established by Congress to protect investors. The legislation would also require publicly traded companies to certify that they are not owned or controlled by a foreign government and to make specific disclosures, such as whether officials of the Chinese Communist Party are members of their board. The House of Representatives could choose to pass this bill as is, which would send it to Trump's desk for approval before he leaves office. In a parallel development, there are reports that the SEC intends to propose a regulation by the end of the year that would delist Chinese companies if they do not allow the PCAOB to review their audits. Such a rule would likely have to be finalised during the Biden administration in order to take effect.

One last potential parting shot at China could be the enactment of the Uyghur Forced Labour Prevention Act (HR 6210), a bipartisan bill that the House of Representatives passed on 22 September 2020 by a lopsided vote of 406 to three. The bill would impose additional restrictions relating to China's Xinjiang Uyghur Autonomous Region, including the prohibition of certain imports from Xinjiang and the imposition of sanctions on those determined to be responsible for human rights violations there. The bill has not yet been taken up in the Republican-controlled Senate and there has been resistance from industry. However, an 11th-hour show of support from Trump would greatly improve its prospects for enactment in one form or another.

Aman Kakar, associate, contributed to the preparation of this article.