Analysis: More Chinese companies could fall under Biden's broader investment ban

Luokung Technology

08/06/2021 01:00

By Karen Freifeld
    June 7 (Reuters) - President Joe Biden's order last week
banning U.S. investment in certain Chinese companies is broader
than a similar one signed by his predecessor Donald Trump and
has a lower bar, making it easier to add more companies later.
    Legal experts say it also may help the administration avoid
embarrassing defeats in court after a ban imposed near the end
of the Trump administration failed to hold up against legal
challenges.
    Biden's order will prohibit U.S. investments in about 60
companies in China's defense or surveillance technology sectors.
 urn:newsml:reuters.com:*:nL2N2NL1VF L2N2NL1XR 
    "It's broader in scope and it's a much lower standard for
listing," said Washington lawyer Kevin Wolf, a former Commerce
Department official, adding it should better withstand legal
scrutiny.
    The new order prohibits investments in companies that
"operate in or have operated in" China's defense or related
materials sector, or in surveillance technology, or are owned or
controlled by someone who does. Its aim is to limit the flow of
money to companies that undermine U.S. security or "democratic
values," which allows listings for human rights abuses.
    The Trump ban was placed on Chinese military companies as
defined years ago in the National Defense Authorization Act:
companies owned or controlled by or "affiliated with" the
People’s Liberation Army, a government ministry or the People's
Republic of China's defense industrial base. 
    The revised order eliminates the requirement for a direct
link to the Chinese state, using the more vague language that a
company must "operate in" the defense or surveillance sectors.
    The Trump order needed to be shored up after three 
companies went to court to challenge it. Two got their
designations halted, and there's been no ruling in the third
case. 
    "Courts are usually reluctant to overrule the president when
he makes a national security determination," said Bill Reinsch,
a senior advisor at the Center for Strategic and International
Studies (CSIS). "The fact that they did so suggests really poor
drafting on the part of the Trump people and a poor defense of
the decisions made." 
    
    "ARBITRARY"
    Beijing-based smartphone maker Xiaomi, which lost some $10
billion in market capitalization in the month after it was
included on the list of banned firms, was the first to bring a
case to try to expose flaws in Trump's order.  
    The judge halted Xiaomi's designation in March citing a lack
of evidence it was affiliated with the PLA or PRC, and calling
its listing "arbitrary and capricious." 
    The government's evidence included an award given to
Xiaomi's chairman, which more than 500 entrepreneurs had
received since 2004, including the leaders of an infant formula
company. It also cited Xiaomi's investments in 5G and artificial
intelligence technology, but the judge noted they are fast
becoming standard for consumer devices, not just military
modernization. 
    The judge also noted errors in the government's decision
memo, including incorrectly quoting the statute at issue, and
said the government did not meet the definition of "affiliated
with," namely, "effectively controlled by another or associated
with others under common ownership or control." 
    Last month, the Biden administration agreed to remove the
company from the list.
    Luokung Technology Corp, a mapping technology company, won a
similar initial ruling.
    Neither Xiaomi, nor Luokung nor Gowin Semiconductor, the
third company that challenged its designation, are on the
revised list.
    Major Chinese firms included under both orders include China
National Offshore Oil Corp (CNOOC)  0883.HK , Hangzhou Hikvision
Digital Technology Co Ltd  002415.SZ , Huawei Technologies Ltd
 HWT.UL  and Semiconductor Manufacturing International Corp
 0981.HK . 
    Hong Kong-based lawyer Wendy Wysong, who had been
considering bringing cases over Trump's order, said Biden's
listings appear to be on more solid ground.  urn:newsml:reuters.com:*:nL1N2LD2YY
    "It may be harder to challenge the designation because the
underlying rationale presumably won't be so weak, and the
designation criteria is not as narrowly worded," said Wysong.
    Many more companies could be affected by Biden's order
depending on "how aggressive the U.S. administration wants to
be," said CSIS's Reinsch.
    "In theory it could expand the universe rather
significantly," he said.

 (Reporting by Karen Freifeld
Editing by Chris Sanders and Sonya Hepinstall)
 ((karen.freifeld@thomsonreuters.com; +1(646) 223-6921;))