Draft guidance on China investment ban spurs tensions in Trump administration -sources

FILE PHOTO: Flags of U.S. and China are displayed at AICC's booth during China International Fair for Trade in Services in Beijing

By Alexandra Alper

WASHINGTON (Reuters) -A debate is raging within the Trump administration over guidance the Treasury Department is seeking to publish to clarify a recent directive banning U.S. investors from buying shares of some top Chinese companies, people familiar with the matter said.

The State Department and the Department of Defense (DOD) are pushing back against the content of a “frequently asked questions” release that the Treasury Department has prepared to spell out the fine print of the White House’s November order, which has stirred anxiety on Wall Street, the two people said.

One of the people familiar with the matter said that tensions between the agencies stem from the view that the Treasury is seeking to water down the executive order, in part by excluding subsidiaries from the ban. But a third source, a U.S. official, said “the Treasury Department’s guidance will be in line with the overall intent of the (executive order).”

The Defense Department and the Treasury did not immediately respond to requests for comment. A State Department spokesperson said the agency doesn’t comment on interagency deliberations.

Still, the debate highlights longstanding tensions between U.S. government agencies over policy toward China, with many national security-minded officials taking a tougher line than those seeking closer economic ties.

Starting in November 2021, the directive bars U.S. investors from buying securities of Chinese companies that the Pentagon has designated as owned or controlled by the Chinese military.

So far, the Pentagon has added 35 companies, including oil giant CNOOC and China’s top chipmaker SMIC, to the blacklist, which was mandated by a 1999 law that the Defense Department did not comply with until this year.

Index providers have already begun shedding some of the designated companies from their indexes. However, questions remain over whether subsidiaries of the blacklisted companies will also be subject to the restrictions.

Kevin Wolf, a trade lawyer at Akin Gump in Washington, said the scope of the Chinese companies covered by the order was a key unanswered question. “Are they going to go the road of what was listed or are they going to go the road of a traditional sanction and also apply it to affiliates?” he asked.

It was not immediately clear when the guidance would be published, nor prospects for the outcome of the debate. Democratic President-Elect Joe Biden, who takes office on Jan. 20, could take a different approach to the directive or even revoke it.

The Biden transition team has declined to comment on his plans regarding the order.

(Reporting by Alexandra Alper; additional reporting by Humeyra Pamuk and Idrees Ali; editing by Richard Pullin)