China Satcom, which Washington placed off-limits to US investors, is preparing a private placement of 400 million new shares and has opened a bank account for the expected funds. “The process with regard to the private placement is moving along in an orderly way,” Li Zhongbao, the company’s chairman, told investors during an online conference on Sept 16.
China Satcom and its controlling shareholder, China Aerospace Science and Technology Corp (CASC), were among 68 Chinese military-industrial companies, known as CMICs, whose equity Washington has targeted for sanctions, curbing US investors’ ability to back them financially. But while the restrictions make it more difficult for the companies to grow, Beijing is doing its best to fill the gap and keep the key strategic sector on track.
Washington’s sanctions “really have had a major impact on Chinese firms”, given their reliance on American capital, said Tai Ming Cheung, a professor at University of California San Diego and an expert on Chinese and regional defence issues. He said the sanctions had “forced China to double-down” on self-reliance.
“The Chinese government has significantly increased support for these firms, through the domestic stock market and government funding supports,” he said. “They are hoping, in a few years, that these Chinese firms can resume their technological developments despite these hits.”
The sanctions, initiated at the end of Donald Trump’s presidency and continued by President Joe Biden, originally decreed that all US investors must divest from Chinese companies deemed to have links to the country’s military by June 3, the end of a one-year grace period.
A few days before the deadline, the Biden administration quietly softened the terms, allowing investors to hold on to those shares, although they are banned from selling them without Washington’s permission.
Lawyers at US law firm Mayer Brown say that the last-minute change “should not be taken as a message that CMIC sanctions will have no teeth. All persons dealing with CMIC securities in their businesses should take their US sanction compliance obligations seriously.”
The full impact of the sanctions is difficult to grasp, but research by Nikkei Asia into 40 listed companies among the 68 on the target list reveals substantial changes in many of their shareholding structures.
Among those listed, 34 have disclosed comparable shareholders’ data between the end of this June and a year earlier. Of those 21, or more than 60%, have seen a decline in the number of shareholders.
China SatCom lost almost 10% of its shareholders over the year, while AVIC Xi’an Aircraft Industry Group, a Shenzhen-listed unit of core state-owned military-industrial conglomerate Aviation Industry Corp of China (AVIC), lost more than 20%.
The number of A-shares held by outside investors through the Hong Kong Stock Connect program – one of the two major channels for foreign capital to flow to mainland Chinese-listed companies – dropped significantly as well.
Of the 29 companies open for investment through this channel, 21 had a decrease in their offshore shareholdings compared with last September. (The Hong Kong Exchange only provides data for up to 12 months)
Hong Kong Securities Clearing Company (HKSCC) – which provides clearing services for transactions made via Stock Connect and appears on shareholders’ disclosures – disappeared as a top 10 shareholder for least 13 companies, as of the end of June.
State-backed investors are filling the gap. The National Military-Civil Fusion Industry Investment Fund, led by China’s finance ministry, has been actively buying up shares of US-sanctioned companies.
It has emerged as fifth-largest shareholder in AVIC Jonhon Optronic Technology, a Shenzhen-listed manufacturer of key connecting devices for optical communications. The fund is also a key shareholder in other sanctioned companies, including AVIC Heavy Machinery, which makes iron castings and hydraulic machinery, and Aerospace CH UAV, a drone maker under CASC.
In the case of Changsha Jingjia Microelectronics, China Integrated Circuit Industry Investment Fund, a strategic state-backed investor that supports Chinese chipmakers, increased its stake, while HKSCC disappeared from the top shareholders’ list.
Merger plans involving US-sanctioned companies are also underway. China Avionics Systems, another AVIC unit, said Tuesday that it has received approval from the State-owned Assets Supervision and Administration Commission to acquire Shenzhen-listed AVIC Electromechanical Systems.
The merger is intended to create an “important listed-company platform for aviation machinery systems for the AVIC Group,” according to the stock exchange filing by China Avionics.
The US curbs on investment in Chinese military-linked companies have already led to four being evicted from the New York Stock Exchange.
In addition to China Unicom, which already had its subsidiary listed in Shanghai, the other three – China Telecom, China Mobile and CNOOC – were swiftly granted so-called “homecoming” listings in Shanghai, which increased the size of their shareholder bases.
Semiconductor Manufacturing International Corp (SMIC), China’s largest chip foundry, also had a homecoming listing last September, although its delisting from the NYSE dates from 2019.