By Frances Yoon
Two Chinese state-owned firms recently labeled by the U.S.
Defense Department as "Communist Chinese military companies" are
selling billions of dollars in bonds with the help of Western
The label doesn't impose any legal restrictions and in itself
has no bearing on whether a company can do business in the U.S.
Still, legal experts and financial analysts said the sale was
notable because the labeling could be a signal of sanctions to come
and could pose reputational risks for the banks that are running
the sale and investors who buy the bonds, even though they aren't
breaking any U.S. laws.
The bond sales by China National Chemical Corp. and China Three
Gorges Corp. also indicate that the Pentagon designation for now
isn't hindering international fundraising. U.S., European and
Chinese banks are managing the sale and marketing the bonds to
"While it is unclear what specific policy outcome the Pentagon
had in mind when publishing this list, it will take notice that
banks continue to do business with these Chinese companies," said
Benjamin Kostrzewa, an international trade lawyer at Hogan
He said that could play into decisions on whether to take
further steps to limit the Chinese groups' access to U.S. markets.
In addition, he said: "Banks may face reputational risks if the
U.S. government takes swift action against the Chinese companies,"
such as adding them to lists of sanctioned entities.
On Tuesday, power company China Three Gorges began selling five-
and 10-year dollar bonds, according to a term sheet seen by The
Wall Street Journal. The day before, ChemChina priced $2.4 billion
of dollar bonds along with the equivalent of $593 million in bonds
denominated in euros.
Units of Bank of America Corp. and Goldman Sachs Group Inc. are
working on ChemChina's bond offering, as are various European and
Chinese institutions. JPMorgan Chase & Co. and Morgan Stanley
are among underwriters for the Three Gorges deal.
An official at one of the banks said there were no restrictions
barring firms from doing business with companies on the Pentagon
list. Representatives for the rest declined to comment.
"If American firms are arranging deals for strategically
sensitive Chinese companies that are being targeted by parts of the
U.S. government, we cannot rule out...tensions with their home
regulator if additional sanctions are placed or if things heat up
to the next level," said Brayan Lai, senior research analyst for
The Pentagon in August named both borrowers as "Communist
Chinese military companies," a designation that stems from
legislation passed in 1998. It said it aimed to highlight and
counter efforts to modernize China's People's Liberation Army via
"military-civil fusion," the use of advanced technology acquired or
developed by civilian entities.
In an emailed statement, the Pentagon said it released the
information to comply with its statutory requirements, "advance due
diligence, and enhance the security and resiliency of our defense
"We encourage U.S. government entities, companies, investors,
academic institutions, and like-minded partners to use this list as
a tool for conducting due diligence with regard to partnerships
with these entities, particularly as the list grows," it added.
An earlier list in June applied the same label to 20 other
companies. The administration has taken a number of steps to
restrict what it says is the flow of goods to China's military. The
Pentagon didn't respond to a request for comment.
The Pentagon labeling could be aimed at discouraging other
companies from doing business with them, lawyers at Arent Fox wrote
in a July briefing. It could also in theory lay the groundwork for
presidential sanctions barring U.S. counterparts from engaging in
most U.S. commercial activity with the named companies, the lawyers
China's Foreign Ministry has said the list was made without
proof or a legal rationale, and that the U.S. was abusing state
power to attack Chinese companies. ChemChina and Three Gorges
didn't respond to phone and email requests for comment.
ChemChina's offering document said the listing didn't mean it
had been subject to export controls or economic sanctions, and it
was able to pay and collect funds as usual.
S&P Global Ratings said it saw no immediate impact on
ChemChina's creditworthiness. Similarly, in a research note,
CreditSights said the list had no immediate ramifications but
increased the risk of other U.S. actions, such as a block or freeze
of property or businesses located in the U.S. or in key allied
A Hong Kong-based investor at a U.S. asset manager said the list
was concerning for firms like his with large ChemChina
bondholdings, since these investments could fall in value if the
company were to come under sanctions that damage its financial
health. He also said his company's holdings of the bonds could lead
to reputational problems.
He said his institution had contemplated trimming its holdings
of ChemChina bonds. However, he said the company's bonds offered a
higher yield than similar Chinese dollar debt that was hard to
Xie Yu and Nancy A. Youssef contributed to this article.
Write to Frances Yoon at email@example.com
(END) Dow Jones Newswires
September 15, 2020 22:33 ET (02:33 GMT)
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