President Trump started capital market sanctions on China in November 2020. President Biden continued and expanded the list of companies in June 2021. Treasury’s Office of Foreign Assets Control (OFAC) was instructed to ban Wall Street investments into dozens of Chinese defense contractors. This has been in effect since 2022. But out of a list of 70 companies, three are still in the portfolios of BlackRock and Vanguard. They seem to have escaped any scrutiny.
How can Wall Street still own the stocks of these sanctioned companies?
First, if a company is on the OFAC list, it means American individuals and American-domiciled asset managers cannot purchase that company’s stocks or bonds. Wall Street has already sold the majority of those companies.
The lists, known in Washington parlance by the acronym NS-CMIC, which stands for Non-SDN-Chinese Military Industrial Complex Companies, were put in place by both administrations under the notion that it made no sense for American capital to fund the construction of Chinese hypersonic missiles, and surveillance technologies used to imprison the Uyghurs in Xinjiang.
The Three “Escapees”
Biden removed some names from Trump’s 2020 list, and added new ones. Based on the updated Biden list, here are three that are still attracting U.S. capital, despite OFAC’s intent.
China United Network Communications Group Ltd was on Trump and Biden’s lists. No matter how you slice the company up into offshore units and Hong Kong subsidiaries, this company, which trades under the ticker 600050 in Shanghai, was an intended target of the White House. Vanguard owns this stock in two emerging market mutual funds and BlackRock owns it in two of their iShares ETFs. The XTrackers China CSI-300 ETF, ticker symbol ASHR, also owns that company’s shares, according to Morningstar.
Sometimes it is a matter of entity name. One could be a holding company that is not part of the sanctions regime, but one of its holdings can be.
In this case, both Trump and Biden listed the company as China United Network Communications Group Ltd., a real company name, and owners of another sanctioned telecom called China Unicom (HK: 762). Wall Street firms have sold out of that stock, but own its parent in Shanghai.
Wall Street giants like JP Morgan, which has offices in China geared towards mainland and other Asian clients, also own China United Network Communication’s stock.
China North Industries Group Corporation Limited develops and manufactures defense equipment such as armored assault vehicles, precision strike equipment, long-range missile launchers, defense aircraft, antimissile equipment, and more. They also manufacture heavy-duty equipment used for building railroads. This one is a question of “semantics”.
China North Industries Group Corporation is best known as Norinco Group, or just plain Norinco. Norinco trades under the ticker 000065 in Shenzhen. Vanguard owns Norinco shares in two emerging market mutual funds. Their website is hosted by China North Industries Group Corporation. The OFAC list does name Norinco as an alias, but Vanguard has invested in the stock because the ticker belongs to Norinco International and not just Norinco, which is focused more on domestic infrastructure projects and is where all the Western capital flows into the Group.
Norinco also owns a defense contractor called North Industries Group Red Arrow Company Ltd., which trades in Shenzhen under the ticker 000519. They make the Red Arrow anti-tank missile launcher for Norinco and while American investors are not allowed to invest in China North Industries Group, for some reason they can invest in Red Arrow. Vanguard and BlackRock own this stock, according to Morningstar.
China National Nuclear Corporation, or CNNC, isn’t just in charge of all of China’s nuclear power plants. They also manufacture and do research for nuclear weapons. CNNC is the parent company of China National Nuclear Power (CNNP), among others. They are transparent about this on their homepage. Vanguard owns the power company shares. CNCC does not have shares. CNNP trades on the Shanghai stock exchange under the ticker 601985.
A lot of these companies on the OFAC list have majority stakes in other companies, or are parents of companies that could, in theory, be used as a backdoor to funnel investor flows their way. CPA is working on revealing some of those corporate family trees in the months ahead and advocating for policy changes that would properly sanction corporate affiliates and family trees that can easily siphon foreign investor capital into related companies. For example, Amazon owns AWS, a cloud service provider, and it owns MGM Studios, a filmed entertainment and distribution company. Investing in Amazon stocks is an investment in all of those things.
Treasury has been careful about what to sanction and what not to sanction. In the case of CNNC, it looks like that the White House wanted to curtail business with CNNC but not CNNP, which manages nuclear power plants. One of CNNCs other businesses, China Nuclear Engineering Corporation Limited (ticker 601611, Shanghai), is a defense contractor on the weapons side, but Wall Street has no presence there.
All told, OFAC sanctions have worked to take American investor capital away from dozens of Chinese defense contractors. Only a couple of companies have managed workarounds. No new companies have been added to this list and despite previous White House commitments to make these lists living and breathing, as has been indicated by other policy choices by this administration, no more companies are expected to be added.
“The limited use of capital markets sanctions – and the small list of companies – is a concern and will remain as such,” said Robby Saunders, Vice President for National Security at CPA. “But their effectiveness seems to be evident based on this recent research. The proper takeaway and next steps would be to tighten the list to cover companies by stock tickers and entire corporate family trees to include their affiliates. We all know money is fungible and we must act prudently to limit U.S. investors financing malign behaviors of the CCP. There are easily dozens of companies that can be on that defense industry NS-CMIC List at Treasury.”