The US Treasury has blocked an attempt by the Pentagon and state department to put some of China’s largest tech companies on a blacklist that would have banned US investors from holding their stock.
The Pentagon and state department had pushed hard to add Alibaba, Tencent, and Baidu to a list of Chinese companies that the defence department alleges has links to the Chinese military.
But according to three people familiar with the situation, Treasury secretary Steven Mnuchin won out in a battle with Mike Pompeo, the hawkish secretary of state, and Chris Miller, the defence secretary.
President Donald Trump in November signed an executive order that barred Americans from investing in Chinese companies with links to the People’s Liberation Army. His administration later clarified that the banned targets would be taken from a list of Chinese groups with ties to the PLA. The Pentagon had been required to produce the list by Congress.
Mr Trump on Wednesday issued an amended version of the order, which said investors must divest any securities of companies on the Pentagon list within one year of the companies being added to it.
In the final weeks of the Trump administration, China hawks had hoped to add Alibaba, the Chinese ecommerce group, and Tencent, the technology company that owns the WeChat messaging app, to the Pentagon list. They also wanted to include Baidu, the Chinese internet search engine.
While the push was partly the continuation of an effort to take a tougher security stance on China, some officials wanted to take action that would have been hard for Joe Biden to rescind after he becomes president on January 20. The new administration faces bipartisan pressure in Congress for Washington to be tougher on Beijing.
After a meeting between Mr Mnuchin, Mr Pompeo and a top Pentagon official earlier this week, China hawks thought they had won. But Mr Mnuchin managed to change the outcome, suggesting he convinced Mr Trump to back him. He had argued that putting Alibaba on the list would have been a huge problem for US investors.
“Removing the 'Big 3' from the Pentagon list of Chinese PLA-linked companies risks sending the message that concern over potential US investor losses supersedes the protection of vital American national security interests,” said Roger Robinson, a former US National Security Council official.
“That said, the overall use of highly effective capital markets sanctions against such PLA-affiliated Chinese enterprises is now established.”
One person familiar with the internal debate said Mr Mnuchin had benefited from the recent departure of Matt Pottinger, the China hawk who served as deputy national security adviser.
Mr Pottinger resigned last week in protest over the way Mr Trump responded to the storming of Capitol Hill that led to five people being killed. Over the past four years, Mr Pottinger has been the leading architect of many of the tougher security policies on China.
Mr Mnuchin’s win comes one month after he suffered a loss in a similar battle over China. The Treasury had tried to block an effort to add the subsidiaries of the Chinese companies already on the Pentagon list to the blacklist. But he lost that fight following opposition from Mr Pompeo and others.
The Treasury published several directives last week as it sought to address confusion over how companies should adhere to the executive order, which had prompted mixed messages from the New York Stock Exchange about whether it would delist some Chinese companies. The Treasury ultimately named several US subsidiaries of the Chinese businesses explicitly targeted by the sanctions.
While Mr Mnuchin succeeded in blocking the Pentagon from adding Alibaba and the other high-profile companies to the blacklist, the Trump administration has continued to pursue an aggressive policy to counter Beijing’s “military-civil fusion” strategy.
Because Beijing can compel Chinese companies to share technology with the PLA, China hawks in the administration have argued that the strategy means US investors who invest in Chinese companies are effectively helping the Asian country and damaging US national security.
Another person familiar with the internal discussions in the administration said proponents of adding Alibaba argued that the recent Chinese government crackdown on the ecommerce group, and speculation about the whereabouts of its founder Jack Ma, had underscored the view that big Chinese private companies were not immune from Chinese Communist party pressure.
The Pentagon, state department, NSC and Treasury declined to comment.
Follow Demetri Sevastopulo on Twitter
Get alerts on US-China relations when a new story is published