November 13, 2020 – Stealth War Newsletter 16

On Thursday, President Trump signed an executive order banning Americans from investing in 31 Chinese companies that the U.S. says supply and otherwise support China’s military, intelligence and security services. This move marks the administration’s first major move toward decoupling American financial markets from China. Even if it were to be later rescinded by an incoming Biden administration, it marks a “historic” warning to U.S. investors about the risks associated with Chinese holdings.

The order, which goes into effect on January 11, blocks American companies from owning shares directly or through funds in any of the targeted companies, which include state-run aerospace, shipbuilding and construction companies as well as technology companies such as Hangzhou Hikvision Digital Technology Co. and Huawei. The latter are heavily involved in developing China’s authoritarian surveillance systems and help expand the PLA’s access to dual-use advanced technologies under the banner of military-civil fusion.

The Trump administration began scrutinizing Chinese companies’ use of U.S. capital markets and financing earlier this year, and the 31 companies in the executive order were previously identified as “Communist Chinese military companies” in blacklists released in June and August. Two of the companies named in the executive order, China Mobile Communications and China Telecommunications Corp., have subsidiaries that trade on the New York Stock Exchange. Additionally, mainland Chinese stocks have increasingly made up a large portion of major indexes that track emerging markets. Investment portfolios and retirement funds often include these indexes, leading their clients—many of whom are average Americans—to inadvertently support China’s military and intelligence services. The number of Americans who own such securities and the value of their investments is unclear, said White House officials.

Amid the tumult of recent elections, the deadline to ban TikTok in the U.S. has quietly passed. Although a major concern for U.S. regulators earlier this year, who feared that the wildly popular social media app could present major national security risks because of its ties to the Chinese government, impetus for the ban has waned. The U.S. Commerce Department has accepted a Pennsylvania federal court decision blocking the ban, and will not enforce an executive order issued in August which stated that TikTok would be banned from U.S. markets unless it was divested to a U.S. company by November 12. Microsoft, Oracle, and Walmart were all in talks to buy a U.S. subsidiary of TikTok at various points, but no deal was ever finalized. Despite accepting the injunction, the Commerce Department has filed to appeal the court’s decision.

The situation in Hong Kong continues to deteriorate rapidly. On Monday, the U.S. State and Treasury Department announced sanctions on four more Chinese government security officials in Hong Kong, penalizing them for their alleged role in implementing a June national security law which has been used to crush dissent in the semi-autonomous city. The U.S. previously sanctioned ten Hong Kong officials, including chief executive Carrie Lam, for similar reasons in August. Secretary of State Mike Pompeo said in a statement, “These actions underscore U.S. resolve to hold accountable key figures that are actively eviscerating the freedoms of the people of Hong Kong and undermining Hong Kong’s autonomy.”

But rapidly unfolding events in Hong Kong drove home the symbolic nature of such sanctions. Late last week, Hong Kong police forces rolled out a new hotline for residents to anonymously report breaches of the national security law which criminalizes secession, subversion and collusion with foreign forces. “By encouraging people to report on their friends and neighbors, the Chinese government is replicating in Hong Kong one of its most successful tools for social control: an informant culture,” senior China researcher at Human Rights Watch Maya Wang said of the new development.

This Wednesday, China’s National People’s Congress Standing Committee passed a resolution declaring that any lawmaker who supports Hong Kong independence, refuses to acknowledge China’s sovereignty over the city, threatens national security, or colludes with external forces to interfere in the city’s affairs should be disqualified. Within minutes of the announcement, Hong Kong officials ejected four pro-democracy lawmakers from Hong Kong’s legislature, the Legislative Council (LegCo). Later that day, the remaining 15 members of LegCo’s pro-democracy bloc announced that they would resign in solidarity. In one day, Beijing effectively muzzled its legislative opposition in Hong Kong. The move effectively strips all pretense of LegCo’s autonomy from Beijing, dealing another blow to the “one country two systems” framework that has long preserved democratic freedoms in the liberal city.

A professor and researcher with strong ties to China has pleaded guilty to making false statements to federal authorities as part of a biomedical research fraud scheme. The man, Song Guo Zheng, had led a team conducting autoimmune research at Ohio State and Pennsylvania State. Zheng admitted to lying about conflicts of interest on applications in order to gain approximately $4.1 million in grants from the National Institutes of Health (NIH) while hiding his participation in Chinese Talent Plans and his affiliation with a Chinese government-controlled university. Zheng’s guilty plea marks the end of a case which began with his attempted flight out of the country via Anchorage, Alaska. Commenting on the case, U.S. Assistant Attorney General for National Security John Demers said, “Federal research funding is provided by the American tax payers for the benefit of American society—not as a subsidy for the Chinese Government…we will continue to hold accountable those who choose to lie about their foreign government affiliations in an attempt to fraudulently gain access to these funds.”

Multiple other researchers—representing both Chinese and American nationals—have been swept up in the Department of Justice’s aggressive prosecutions of Chinese influence and knowledge theft in academia, which have been massively stepped up this past year.

Finally, Brazil continues to be caught between the U.S. and China’s race to dominate international telecommunications networks. It reportedly snubbed the U.S. in favor of Huawei last week, when four of Brazil’s largest telecom carriers declined to meet with a visiting senior U.S. official who has advocated for excluding China’s Huawei from the Brazilian 5G equipment market. But this Monday, Brazil’s right-wing government officially announced its support for the U.S.’s Clean Network proposal, which envisions a global alliance that excludes technology that Washington fears could be corrupted by Chinese influence. Brazil became the 50th country to sign on to the initiative, which also includes 170 telecom firms and many of the world’s leading high-tech companies. Despite this show of support, Brazil has not formally banned Huawei from participating in its 5G spectrum auctions. Nor has it announced any plans to comprehensively remove Huawei technology from its existing telecommunications infrastructure.

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