U.S. Targets Xiaomi, Cnooc in Trump’s Late Anti-China Push

(Bloomberg) -- The Trump administration blacklisted Chinese smartphone manufacturer Xiaomi Corp. for alleged military links along with the country’s third-biggest oil company over its drilling in the South China Sea, part of a final push to ratchet up pressure on Beijing before President-elect Joe Biden takes office.

Xiaomi was one of nine firms added to the Defense Department’s list of Chinese military companies, a move that will restrict U.S. investments in its securities. Other firms include state-owned planemaker Commercial Aircraft Corp. of China Ltd., or Comac, which is central to China’s goal of creating a narrow-body plane that can compete with Boeing Co. and Airbus SE.

Meanwhile, the Commerce Department’s move against China National Offshore Oil Corp., the nation’s main deepwater explorer, denies it access to U.S. technologies without specific permission. It follows a December decision to blacklist more than 60 other Chinese companies.

Read more: U.S. Blacklists Xiaomi in Widening Push Against China Technology

“This measure by the Trump administration once again demonstrates to the public, to the international community, what is unilateralism, double standards and bullying,” China Foreign Ministry spokesman Zhao Lijian told a briefing in Beijing on Friday. “The Chinese side will take necessary measures to ensure the legitimate and lawful rights and interests of Chinese companies, and we will stand by our companies, to protect, to uphold their rights and interests in accordance with law.”

Spokespeople for Xiaomi, Cnooc and Comac had no immediate comment. China National Aviation, named on the Pentagon list, didn’t immediately respond to a request for comment.

The new raft of curbs mark a late push by President Donald Trump to ensure his pressure campaign against China stays in place long after he leaves office next week. While Biden and many Democrats say they oppose Trump’s tactics on China, the restrictions will give the new president increased leverage over Beijing when his team negotiates on trade with leaders of the world’s second-largest economy.

Biden’s Pledge

Biden has pledged to work with allies to develop a more coherent strategy against China, though it’s not clear whether there’ll be any immediate shifts in policy. Under an executive order signed by Trump last year targeting what it calls China’s abusive business practices, U.S. investors will need to unwind stakes in designated companies by November.

Read more: Biden Will Inherit a Strong Hand Against Xi, Thanks to Trump

Xiaomi surpassed Apple Inc. in smartphone sales in the third quarter, according to the International Data Corporation. It joined Hong Kong’s Hang Seng Index in September after grabbing market share from Huawei Technologies Co. as U.S. sanctions on Huawei deepened.

Unless the ban against Xiaomi is reversed, the smartphone maker risks being delisted from U.S. exchanges and deleted from global benchmark indexes. China Mobile Ltd., China Telecom Corp. and China Unicom Hong Kong Ltd. were removed by MSCI Inc. last week, while S&P Dow Jones Indices will drop Cnooc from its gauges next month.

Xiaomi shares closed 10% lower in Hong Kong, while its suppliers also tumbled. FIH Mobile Ltd., which helps it assemble smartphones, plunged 14%. Component suppliers including Largan Precision Co., Sunny Optical Technology Group Co. and AAC Technologies Holdings Inc. also fell. Spreads on Xiaomi’s dollar bonds widened as much as 40 basis points Friday morning, according to credit traders.

Cnooc’s listed unit, Cnooc Ltd., fell 1.1% in Hong Kong. Cnooc is the smallest of China’s so-called big three state-owned oil majors after China National Petroleum Corp. and China Petrochemical Corp., also known as Sinopec. The company’s operations in the South China Sea have proved controversial with neighbors because China claims drilling rights in waters far from its borders, and within 200 miles of countries like Vietnam and the Philippines.

“China’s reckless and belligerent actions in the South China Sea and its aggressive push to acquire sensitive intellectual property and technology for its militarization efforts are a threat to U.S. national security,” Commerce Secretary Wilbur Ross said in a statement. “Cnooc acts as a bully for the People’s Liberation Army to intimidate China’s neighbors, and the Chinese military continues to benefit from government civil-military fusion policies for malign purposes.”

The Lists

The Trump administration has now listed 44 Chinese companies effectively owned by the People’s Liberation Army under a 1999 law, which authorizes the president to potentially impose sanctions on them. Trump signed an order in November barring American investments in Chinese firms owned or controlled by the military in a bid to pressure Beijing over what it views as abusive business practices.

The Department of Commerce’s blacklist, which was created last year to highlight restrictions on more than 100 businesses connected to China, Venezuela and Russia, is more severe and prohibits American firms from supplying those entities without a license.

It was not immediately clear why Cnooc had been added now after it was not included in earlier listings. The ban also doesn’t apply to sales of hydrocarbons such as crude oil and also wouldn’t affect joint ventures between Cnooc and Western companies, a senior administration official, speaking on customary condition of anonymity, told reporters in a briefing Thursday.

Subsidiaries of Cnooc have stakes in two U.S. shale oil and gas projects, according to Daiwa Capital Markets Hong Kong Ltd. The company also has interests in two offshore projects in the U.S. Gulf of Mexico, which are being developed alongside partners including Royal Dutch Shell Plc and Hess Corp.

Other Applications

Various components used in oil drilling can also have military applications, making it unsurprising that Cnooc had been targeted, said Amy Myers Jaffe, a senior fellow for energy at the Council on Foreign Relations. “It’s a hassle for Cnooc, but China has its own oil service industry and offshore industry. It’s probably not as devastating as a company that would lose access to microchips,” she said.

Cnooc has been at the center of territorial disputes since 2012, when it invited foreign drillers to explore blocks off Vietnam that Hanoi’s leaders had already awarded to companies including Exxon Mobil Corp. and OAO Gazprom.

Aerospace company Comac, key to China’s ambitions to deliver locally-made jets to domestic and foreign carriers, relies on U.S. suppliers for about 60% of parts for its C919 passenger aircraft.

Read more: Trump Blacklisting Jolts China’s Ambitions to Take on Boeing

The Commerce Department also added Skyrizon to the military end-user list, saying it poses a threat to national security. Ross said the company’s push to acquire and “indigenize” foreign military technologies posed a significant threat to U.S. national security and foreign policy interests. Skyrizon was unable to be reached for comment.

“This action serves to warn the export community of Skyrizon’s significant ties to the People’s Liberation Army,” Ross said.

(Adds Chinese foreign ministry comments, closes share prices)

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