Securities Law & Corporate Counsel Blog

Financial advisers and broker-dealers should conduct thorough and frequent reviews of their clients’ holdings in certain Chinese companies now that a November Executive Order that prohibits new U.S. investments in companies with alleged ties to China’s military has taken effect.

As of January 11, 2021, the U.S. has banned new investments in 44 listed Chinese companies with a connection to a "Communist Chinese military company."[1] An additional 200 Chinese companies may face delisting on U.S. exchanges if they do not allow federal regulators to review auditing results. Under terms of the Executive Order, U.S. investors have until November 11, 2021, to divest all shares in Chinese companies subject to the ban as determined by the U.S. State Department.

Affected Chinese companies include those “that enable human rights abuses, entities that supported the militarization and unlawful maritime claims in the South China Sea, entities that acquired U.S.-origin items in support of the People’s Liberation Army’s programs, and entities and persons that engaged in the theft of U.S. trade secrets,” according to a U.S. government statement.[2]

List of Banned Companies Under Constant Review

An adviser’s fiduciary responsibility to comply with the ban is complicated by the fact the U.S. has added several Chinese companies to the list in January 2021. As many as 1,100 Chinese companies, many of which are unlisted and not likely to be in the portfolios of U.S. investors, could be subject to the ban.[3]

Some of the affected Chinese companies most popular among U.S. investors include China Telecom (CHA), China Mobile (CHL), China Unicom (CHU), China National Offshore Oil Corp. (CNOOC), smartphone maker Xiaomi, drone maker DJI, semiconductor firm SMIC, and plane manufacturer Commercial Aircraft China.

Chinese companies absent from U.S. exchanges and listed in Shanghai or Hong Kong are subject to the ban. Advisers and investors should note that, as of the date of this article, such index fund favorites as Alibaba, Baidu, and Tencent have not yet been added to the list of restricted Chinese companies, but that could change.

The Role of Indexers, Active Managers, and Advisers

Global index providers FTSE Russell, MSCI, and S&P have been adjusting the underlying indexes of their Chinese ETF portfolios to accommodate the evolving list and comply with the Executive Order. U.S.-based China ETFs have approximately $25 billion in assets under management. In 2020, 30 of those 53 ETFs had better 1-year performance than the S&P 500.[4] 

Those with oversight over such actively managed investment vehicles as hedge funds and mutual funds must remain vigilant to changes in the list of investments restricted by the Executive Order. Advisers with clients who have invested in individual Chinese securities should consider whether existing regulatory policies and procedures are in place to ensure compliance with the Executive Order.

News reports indicate that changes to the Executive Order are not likely for some time since new President Joe Biden’s administration has said it will prioritize COVID-19 vaccinations, economic stimulus, and other issues in the coming months. 

Jacko Law Group can work with your team to put the proper policies and procedures in place to comply with this evolving legal and compliance responsibility. To schedule a consultation, call 619.298.2880 or visit us at jackolg.com.  

[1] The term “Communist Chinese military company” is defined in Section 4(a) of the Executive Order.

[2] https://www.bloomberg.com/news/articles/2020-12-18/u-s-to-blacklist-smic-and-dozens-more-china-firms-reuters-says

[3] https://www.barrons.com/articles/these-chinese-companies-were-added-to-the-u-s-banned-list-what-investors-need-to-know-51610794800

[4] https://www.etf.com/etfanalytics/etf-finder/?sfilters=eyJnZW9ncmFwaHkiOnsiaW4iOlsiQ2hpbmEiXSwib3JkZXIiOjB9fQ==