US authorities are spinning a web of sanctions around China State Shipbuilding Corp (CSSC), which is the world’s largest commercial yard group and a supplier of navy vessels to the Chinese military.
Since August, Washington has unveiled a set of rules designed to cut off financing and supply of equipment and technology to the Chinese state shipbuilding giant amid bilateral tensions between the world’s two largest economies.
Those sanctions do not explicitly ban companies from ordering vessels from CSSC and group affiliates, which are mainly funded by the Chinese state, but US and non-US entities are expected to exert extra caution when dealing with them.
Through a merger initiated by the Chinese government, CSSC formally absorbed China Shipbuilding Industry Corp in 2019 to create a mega-yard group.
Aside from being a major supplier of merchant ships, the group also constructs frigates, destroyers, submarines and aircraft carriers for the People's Liberation Army Navy.
The US has cited CSSC as a “prominent example” of companies supporting China’s territorial aggression in the South China Sea via Beijing’s strategy of “Military-Civil Fusion”.
‘Military’ shipbuilder
In November, the US Department of Defense designated CSSC as one of the “Communist Chinese military companies” in which US individuals and companies cannot own securities directly or through funds.
The ban, which comes into force on 11 January and has a one-year grace period, nominally targets only US investors. But non-US fund managers will need to drop the Chinese firms from their portfolios if they want to keep US clients.
Major index providers, including MSCI, have been cutting those blacklisted from their products in recent weeks to help index-linked funds stay compliant.
Earlier this month, the Department of State also warned US investors not to put money into funds linked to indices that cover the military-linked firms and their affiliates, including CSSC and seven group affiliates.
The affiliates include China Shipbuilding Industry Group Power, China CSSC Holdings Ltd, CSSC Offshore and Marine Engineering, CSSC Science and Technology and CSSC (Hong Kong) Shipping, whose shares are traded on public exchanges, and Shanghai Jiangnan Changxin Heavy Industry, a non-listed unit.
The Office of Foreign Assets Control (Ofac) is expected to issue further guidance on the investment ban. Jonathan Epstein, partner at law firm Holland & Knight, said the sanctions enforcement agency may well see investments in the affiliates as non-compliant.
“I presume that the mutual fund managers with exposure are pressing Ofac to both limit and delineate clearly the scope of this [ban],” Epstein told TradeWinds.
No US-origin technology
Moreover, the Department of Commerce has added 26 research institutes of CSSC and two group yards to its Entity List since August.
Those do not include the reputable Shanghai Merchant Ship Design And Research Institute — another CSSC affiliate. But the two yards — CSSC Huangpu Wenchong Shipbuilding and Chongqing Chuandong Shipbuilding — are both building merchant vessels.
US firms are banned from supplying goods and technology to those blacklisted. Non-US entities face the same restrictions if their supplies have a certain amount of US content, depending on product type.
The impact on CSSC’s supply chain is uncertain.
