WASHINGTON—President Trump signed an executive order prohibiting Americans from investing in a group of Chinese companies the Trump administration says supply and otherwise support China’s military, intelligence and security services.
The order blocks American companies and individuals from owning shares directly or through funds that include any of 31 companies identified by the U.S. as aiding the modernization of the People’s Liberation Army, or PLA, and China’s intelligence and security services.
Those firms, which include large state-run aerospace, shipbuilding and construction companies as well as technology companies such as the video-surveillance-equipment maker Hangzhou Hikvision Digital Technology Co., enable China’s access to advanced technologies and expertise to help the PLA expand and take a more aggressive posture around the world, administration officials have said.
The Trump administration has tried to counter Beijing’s rise as a global competitor, economically, politically and militarily, and has in many instances turned to executive orders and regulatory measures to constrain Chinese companies’ access to U.S. technology, markets and financing.
The order, which administration officials said has been under review for months, prohibits the purchase or investment in stocks, funds or other financial products that include the firms, starting Jan. 11. The order gives investors until November 2021 to divest themselves of any investments containing any of the Chinese securities.
Among the 31 companies, many are traded on mainland Chinese and Hong Kong stock exchanges, and some are purchased by investors as a part of mutual and other funds. Two of the companies—China Mobile Communications and China Telecommunications Corp.—have units whose shares or depositary receipts trade on the New York Stock Exchange.
How many Americans own such securities or even how much money is at stake is unclear, said White House officials. The order is being issued in the midst of a turbulent presidential transition, with the administration trying to complete key objectives, including advancing its China policy. An incoming Biden administration could overturn the investment ban.
Even if reversed, financial-industry executives said, the order is likely to serve as a warning to U.S. investors that their Chinese holdings are at risk because of the strained relations between Washington and Beijing.
“Such a move could dampen U.S. investor interest in funds with exposure to China,” said Todd Rosenbluth, head of exchange-traded-fund and mutual-fund research at the research firm CFRA. The order would affect swaths of the financial ecosystem from brokerages to index providers, asset managers and investors. “There are a lot of moving parts,” he said.
The Chinese Embassy didn’t respond to requests for comment. Previously, Beijing has criticized the Trump administration for what it has said are measures that discriminate against Chinese firms, calling them impediments to global trade and investment.
The Trump administration earlier this year began scrutinizing Chinese companies’ use of U.S. capital markets and financing. The Defense Department identified the 31 companies targeted in the order as “Communist Chinese military companies” in blacklists released in June and August.
White House officials said many Americans are often unaware their retirement plans hold investments in these companies through funds and thus are supporting China’s military and intelligence services.
“American Capital should not be used to finance the construction of Chinese Communist weapons literally aimed at killing Americans and driving the US military out of Asia,” Peter Navarro, the White House’s so-called trade czar, said in an emailed statement. “This strong action by President Trump puts a stop to that Wall Street insanity.”
Blacklisted companies include Aviation Industry Corporation of China, which builds the PLA’s fifth-generation fighter, and China Aerospace Science & Industry Corp., which produces tactical and strategic missile systems. Both have listed units on Chinese exchanges.
Many mom-and-pop investors who invest through funds don’t look under the hood at what they are actually exposed to. One financial analyst likened an investor’s ability to know if he or she owned such securities to a guest in a restaurant wanting to know the ingredients of the dish being served.
Big investment firms have steered client money into China as a new source of returns and to tap into the country’s growth. China became a bigger part of many investors’ portfolios in recent years as index providers added mainland China stocks to major indexes that track emerging markets.
These indexes are a key part of the plumbing of modern financial markets. University endowments, pension funds and everyday investors park money in funds that track these indexes or seek to beat them. China stocks now make up some 40% of major emerging-markets indexes.
As part of the Trump administration’s clampdown on China, the State Department this year urged university endowments to divest Chinese stocks and disclose China holdings in their index funds. U.S. officials have urged exchanges to tighten listing standards for Chinese companies.