The White House’s announcement of a new executive order to combat Chinese companies with ties to Beijing’s military-industrial base and repressive surveillance tactics was met with praise for continuing and refining a commendable Trump-era policy.
On June 3, President Biden issued an order to address the threat from investments that finance certain Chinese firms, ostensibly expanding his predecessor’s Chinese military-company investment ban and moving responsibility for designations of these companies from the Pentagon to the Treasury Department. “President Biden also expanded the scope of this national emergency by finding that the use of Chinese surveillance technology outside the PRC, as well as the development or use of Chinese surveillance technology to facilitate repression or serious human rights abuses, constitute unusual and extraordinary threats,” the White House added in its statement on the move. It announced the 59 Chinese firms that would immediately be targeted under the order, which implements a similar investment ban.
There’s a catch. The new order frees 16 previously designated companies from the Trump-era investment bans, including Dawning Information Industry Co. (or Sugon), a supercomputing firm involved in Beijing’s development of nuclear and hypersonic weapons-testing and in its surveillance of Uyghurs.
What’s strange about this is that the U.S. government still officially views Sugon as a target of other restrictions on Chinese tech companies. Sugon remains blacklisted under the Commerce Department entity list, which prevents U.S. firms from doing business with listees.
In an emailed statement responding to a question about the Sugon delisting, a Treasury Department spokesperson defended the move, suggesting that the designation had been legally vulnerable. “The [executive order] creates new legal standards for designating entities. One of our primary goals was ensuring that any future prohibitions are on legally solid ground, and our first listings under the new E.O. reflect that.”
Sugon has extensive ties to the Chinese military’s industrial base, as described in a recent report by the Foundation for Defense of Democracies on the Chinese Communist Party’s military-civil fusion efforts. These include a strategic cooperation agreement with a Chinese research institute to develop “the application of command and control technology in national defense construction and national security” and Sugon’s contributions to the joint-command system of the People’s Liberation Army. When the firm was initially added to the entity list, James Mulvenon, a Chinese tech expert, told the Washington Post that it was involved in nuclear-weapons simulations and the testing of hypersonic glide vehicles that “can deliver nuclear-tipped weapons at speeds impossible to stop with missile defense systems.”
All of which made it a prime candidate for pre-Biden sanctions on Chinese Communist military companies. And with the new executive order, which expanded the investment ban to repressive surveillance technology, there’s even greater reason to ban U.S. investment in Sugon. The New York Times reported last year that Sugon backed the Urumqi Cloud Supercomputing Center, a massive, world-record-shatteringly fast facility run by Chinese security forces in the Xinjiang region, in close proximity to six prisons and concentration camps. The facility can search 100 million photos per second and perform what Party officials called “predictive policing” — one basis for its persecution of Uyghurs.
This is why the Trump administration added Sugon to the entity list in 2019: to prevent Intel, Nvidia, and other U.S. chip manufacturers from exporting to the company and thus playing a role in Uyghur repression. But until the investment ban went into effect, Americans could still fund Sugon through their investments (usually unknowingly through index funds), and now that the administration has delisted it, they can once again do so.
“Members of Congress in both parties should be asking: If a Defense Department-designated Chinese military company poses the kind of national security threat that warrants Commerce Department export control prohibitions, why is the Treasury Department giving Americans a green light to invest in such a company?” said Maseh Zarif, director of congressional relations at FDD Action.
Some lawmakers are in fact raising that exact question, according to a letter by Representatives Jim Banks and Joe Wilson obtained exclusively by National Review. Citing media reports about Sugon’s role in the Uyghur genocide, they write to Treasury secretary Janet Yellen and Defense secretary Lloyd Austin that it is “illogical” that the administration would also proclaim Chinese surveillance an extraordinary threat and simultaneously remove restrictions on Sugon.
Banks told NR, “This is another example of President Biden taking a successful Trump policy on China and watering it down.”
The initial version of the policy was the result of several moves in the latter half of the previous administration, the most important of which was a November executive order in which the president banned U.S. investment in Pentagon-designated Chinese Communist military companies. Just earlier that year, lawmakers had successfully pushed President Trump to make use of a previously unused provision of the 1999 National Defense Authorization Act to add Chinese military companies to a Pentagon blacklist. The order prohibited U.S. nationals from investing in those firms — and required that they divest of their holdings.
In early 2021, Congress also passed a provision to create a symbolic “name-and shame” list for Chinese military-industrial companies meant to highlight their involvement in the Party’s military-civil fusion efforts.
All told, by the end of the Trump administration, the Pentagon had designated 44 Chinese military-affiliated firms, including Huawei, Semiconductor Manufacturing International Corporation, and the surveillance firm Hikvision, that would be banned under the investment order. Those firms, like many of the other Trump-era designations, are now targets of the new Biden executive order that supplanted that November investment ban.
Treasury seemed to be referring to the legal challenges to the Pentagon’s designations of Chinese companies, such as smartphone manufacturer Xiaomi and geolocation-services provider Luokung, as reason to leave Sugon off the list of designations issued last week.
Both companies brought suits against the Pentagon, each successfully arguing that the Pentagon had failed to conclusively demonstrate their affiliation with China’s military under the definition of the 1999 statute. The ruling on Xiaomi, the first company to win an injunction, prompted the administration to drop the designation; although it hasn’t yet formally done so with Luokung, it will likely do the same. Short of a separate move to expand the scope of the June 3 order, the White House seems ready to just drop the matter, focusing instead on more-easily justifiable claims. A similar dynamic might apply to the delisting of Sugon and the 15 other firms.
But a congressional source disputed the Treasury Department’s explanation, saying that the administration could’ve just expanded the definition if officials had concerns about the Chinese Communist military–company designations being on solid ground rather than removing entities from the list. The president possesses the authority to do just that.
Meanwhile, it was initially unclear whether the executive order requires people to divest themselves of currently held securities in Chinese military firms, as the Trump administration’s moves clearly did. Trump’s investment ban didn’t initially include a requirement to divest, but an executive order in January clarified that U.S. investors would in fact have to dump their positions in Chinese military firms designated by the Pentagon.
The wording of the new order is slightly less clear, which is why Banks and Wilson are seeking an answer about the matter in their letter. Treasury also ought to answer them on Sugon’s 15 fellow de-listees, which include Global Tone Communication Technology Co., GOWIN Semiconductor Corp, and Grand China Air Corp.
Michael Sobolik, a fellow at the American Foreign Policy Council, called the omission of such a provision in the order “curious. It’s possible that the White House will issue an additional order to include a divestment requirement,” he said. “But the natural question to that is, why not just include that now in the first one, because this executive order is pretty clear that it nullifies the previous executive orders on this subject.”
The Treasury spokesperson confirmed on Friday afternoon that the new order applies only to “future purchases and sales of covered securities, whether they are stocks or bonds or other types of securities, and not the mere possession of covered securities by [U.S. persons].” The spokesperson elaborated, saying that the point of the new executive order is to “strengthen the framework and legal foundation” of the Trump-era moves.
In a sense, this episode is emblematic of the administration’s China policy, which appears to embrace the tough approach it inherited and yet also implements thoroughly dubious decisions on the margins. Like many other steps this administration has taken to counter the Chinese Communist Party, a seemingly solid policy raises more questions than it answers.
Editor’s note: This article has been edited for clarification since its original publication.