Trump to add China's SMIC and CNOOC to defense blacklist

AS-CHINA - WASHINGTON. The Trump administration plans to add China's top chipmaker SMIC and oil giant CNOOC to a blacklist of alleged Chinese military companies, escalating tensions with Beijing before President-elect Joe Biden takes office, according to sources familiar with the matter and a document seen by Reuters.

The Department of Defense (DOD) is poised to designate four more Chinese companies as owned or controlled by the Chinese military, bringing the total number to 35. A recent executive order issued by President Donald Trump would prevent U.S. investors from buying securities of the blacklisted firms starting late next year.

It was not immediately clear when the new additions to the blacklist would be published in the Federal Register, making the move official. But the list includes China Construction Technology Co Ltd and China International Engineering Consulting Corp, as well as Semiconductor Manufacturing International Corp (SMIC) and China National Offshore Oil Corp (CNOOC), according to the document seen by Reuters and four sources.

SMIC said it continued "to engage constructively and openly with the U.S. government" and that its products and services were solely for civilian and commercial use. "The Company has no relationship with the Chinese military and does not manufacture for any military end-users or end-uses," it said in a statement.

Shares in SMIC closed 2.7% lower on Monday.

CNOOC's listed unit CNOOC Ltd, whose shares fell by almost 14% on Monday, said in a statement that it had checked with its parent and no formal notice from relevant U.S. authorities had been received.

Asked about Washington's planned move, China's foreign ministry spokeswoman Hua Chunying said Beijing hoped the United States would not erect barriers and obstacles to cooperation and discriminate against Chinese companies.

Later on Monday, Bernstein Research downgraded CNOOC Ltd's stock to 'market perform' by applying a 30% discount to share price targets, citing sanction risks that range from a ban on U.S. funds owning CNOOC stock to prohibiting U.S. companies from doing business with CNOOC.

The DOD did not respond to a request for comment.

SMIC, which relies heavily on equipment from U.S. suppliers, was already in Washington's crosshairs. In September, the U.S. Commerce Department informed some firms they needed to obtain a license before supplying goods and services to SMIC after concluding there was an "unacceptable risk" that equipment supplied to it could be used for military purposes.

The expanded blacklist is seen as part of a bid to cement outgoing Republican Trump's tough-on-China legacy and to box incoming Democrat Biden into hardline positions on Beijing amid bipartisan anti-China sentiment in Congress. The Biden campaign declined to comment.

The measure is also part of a broader effort by Washington to target what it sees as Beijing's efforts to enlist corporations to harness emerging civilian technologies for military purposes.

Reuters reported last week that the Trump administration is close to declaring that 89 Chinese aerospace and other companies have military ties, restricting them from buying a range of U.S. goods and technology.

The list of "Communist Chinese Military Companies" was mandated by a 1999 law requiring the Pentagon to compile a catalog of companies "owned or controlled" by the People's Liberation Army, but DOD only complied in 2020. Giants like Hikvision, China Telecom and China Mobile were added earlier this year.

"Our government is right to treat these firms as puppets of the Chinese government," Republican Senator Tom Cotton said, when asked about the upcoming additions. Cotton, a China hardliner, had called on DOD to release the list last year.

TEETH FOR THE BLACKLIST

This month, the White House published an executive order, first reported by Reuters, that sought to give teeth to the list by prohibiting U.S. investors from buying securities of the blacklisted companies from November 2021.

The directive is unlikely to deal the firms a serious blow, experts said, due to its limited scope, uncertainty about the stance of the Biden administration and already-scant holdings by U.S. funds.

Still, top U.S. asset managers Vanguard Group and BlackRock Inc each own about 1% of shares of CNOOC's listed unit CNOOC Ltd, and together own roughly 4% of outstanding shares of SMIC, disclosures show.

Vanguard and BlackRock declined to comment.

Combined with other measures, the expected move deepens a rift between Washington and Beijing, already at loggerheads over China's handling of the coronavirus and its crackdown on Hong Kong.

Congress and the administration have sought increasingly to curb the U.S. market access of Chinese companies that do not comply with rules faced by American rivals, even if that means antagonizing Wall Street.