188 Chinese companies finally receive the Pentagon's long-overdue blacklist

Folks, this is really nothing new. The U.S. Department of Defense has finally added those 188 Chinese companies to its blacklist. These days, you can't avoid trouble forever. It was supposed to be announced in February, but there was a mix-up—it was released and then withdrawn. Later, after Trump's visit to China, the matter was temporarily eased. Who knew the U.S. government is so fickle? Now what's meant to happen has happened. How could companies like Baidu, Alibaba, Didi, and WuXi, which are closely tied to people's daily lives, be defined by the U.S. government as military enterprises? Friends, don't think it's that simple. According to U.S. think tanks, as long as a Chinese tech company makes headlines in the U.S. three times, it will be blacklisted within three years. Even all Chinese tech companies could face this fate. They also say that the more cutting-edge the field and the stronger the competitiveness, the closer a company is to being listed. This sounds scary, but in essence, it's a tool for the U.S. government to engage in asymmetric competition on behalf of its own companies. To put it bluntly, if they can't win, they play dirty. In the future, this will only become more common. The so-called 1260H list actually originates from Section 1260H of the National Defense Authorization Act for Fiscal Year 2021. The U.S. Congress requires the Department of Defense to identify and track Chinese companies that participate in China's military-civil fusion strategy and help modernize China's military. In practice, as long as a Chinese company has ties to Chinese state organs, especially the Ministry of Industry and Information Technology (MIIT) and the State-owned Assets Supervision and Administration Commission (SASAC), it may be deemed a military enterprise—MIIT oversees the State Administration for Science, Technology and Industry for National Defense, which in U.S. eyes is the command center for military-civil fusion; SASAC is seen as a Trojan horse factory. Behind this is America's fear of military-civil fusion. In its view, there are fewer and fewer purely civilian commercial companies in China's tech sector. So the U.S. criteria for listing are also evolving. In 2021, the initial 1260H list included 47 more traditional military central enterprises and telecom operators. Later, each update added new areas, such as biotech, cloud monitoring, drones, semiconductors, internet platforms, AI models, robotics, electric vehicles, and so on. The latest version has 188 companies, a 40% increase from last year, and last year was already an 83% expansion from the year before. Both were major upgrades. By the way, the reason the February version was urgently taken down was because it mistakenly removed two memory chip manufacturers, ChangXin and Yangtze Memory: the Department of Defense thought they weren't threats, but the White House disagreed and said, 'Add them back,' and in the end, a temporary worker was blamed. So, what is the nature and impact of this list? First, it is different from the Commerce Department's Entity List and the Treasury Department's Specially Designated Nationals List. Those involve technology cutoffs and financial cutoffs, very severe measures. The 1260H list only stipulates that the U.S. Department of Defense cannot do business with listed Chinese companies, but in fact, they weren't supplying the U.S. military anyway, so the impact is small. Indirectly, if research institutions funded by the U.S. Department of Defense cooperate with listed Chinese companies, military funding may be cut off. This is the so-called chilling effect. Not only research institutions are affected, but also Chinese companies' downstream customers, financial institutions, partners, and even PR and legal advisors in the U.S. must self-censor. In reality, the purpose of this list is to brand these companies with a scarlet letter. If you've read Hawthorne's The Scarlet Letter, you know the scarlet letter specifically refers to adultery. Your market entity dares to secretly collude with an enemy government, so upstream and downstream companies dare not approach you, forcing you to adjust your supply chain and increase operating costs. To protect their U.S. market business and avoid local legal risks, companies will also complete de-sinicization at the corporate governance level. More importantly, it sends a sell signal to Wall Street. Companies targeted by the Department of Defense can basically be understood as aiding the enemy, and it's only natural for the Commerce and Treasury Departments to follow suit. So market risk will significantly increase. In the past, we've seen that once listed, stock prices basically plummet, and market value shrinkage is expected. Second, it mainly increases financing difficulties in international capital markets. That's why Chinese companies in the U.S. are desperately trying to shed this military label. Xiaomi is a successful case. After being added to the 1237 list in 2021, it immediately sued the U.S. Department of Defense, but the Department of Defense couldn't provide evidence. They could only say that Lei Jun received an award as an outstanding builder of socialism with Chinese characteristics, and the five ministries that awarded it included MIIT, so Xiaomi is a military enterprise. The U.S. court ruled that the Department of Defense had insufficient evidence and ordered Xiaomi removed from the list. This also became a classic case of Chinese companies' legal counterattack. But Xiaomi is not out of the woods forever; some congressmen have called for it to be added to the 1260H list, though from the new list, it is temporarily safe. In fact, the effectiveness of seeking legal remedies is likely to become increasingly limited. For example, Yangtze Memory is in a judicial battle with Micron, suing Micron for hiring PR to create negative public opinion and influence government decisions. Although there is no final verdict yet, even if Micron loses, it won't cause significant harm to the company. As long as the other side is willing to lobby, they will always find a reason to blacklist you, and there is no end to trying to prove your innocence. In fact, U.S. companies hiring lobbying groups to court congressmen and pressure the Department of Defense to include Chinese companies on the list is a completely legal and extremely low-cost tactic. You spend a few hundred dollars on lobbying and can suppress a competitor worth billions. So objectively, the U.S. approach is to turn national security into a legal weapon for asymmetric commercial competition. But in its own view, this is whole-of-government security defense—you Chinese companies have government backing, so I have to support American companies too. China believes that government subsidies are legitimate industrial policy, and lists like 1260H are unreasonable suppression and unfair competition. The U.S. believes that subsidies are non-market practices, and listing is normal national security defense. This is actually a question of the transformation between offense and defense, spear and shield. You make lists, and now we have blocking laws that do not recognize, do not execute, and do not comply with U.S. secondary sanctions; the U.S. also has institutionalized subsidies, highly intervening in companies, forcing them to comply with national strategic will—it is also concentrating resources to do big things. China and the U.S. each learn from the other's strengths to offset their weaknesses, and ultimately may form two separate ecosystems, trading efficiency for security, coexisting with high friction.