On September 19, 2020, China’s Ministry of Commerce (MOFCOM) released its long-awaited Provisions on the Unreliable Entity List, which is effective immediately. The list is understood to be a direct response to the United States’ Entity List, which several Chinese companies have landed on in recent years, the most notable being the Chinese global telecom giant Huawei. Under China’s new regime, a foreign entity included in the Unreliable Entity List could bear severe consequences that could cripple their business in China. So far, no companies have been listed, but the threat is more real than ever and potentially imminent.

Who is at risk?

Any enterprise, organization, or foreign citizen may be listed if they are found to have done something that endangers the national sovereignty, security, or development interests of China. Considering the broad definition of national security that China’s lawmakers have been applying in other areas of Chinese law, and that the new provisions do not specify individual acts that could land a person or company on the list, it seems the government has broad discretion. The emphasis on national security and development has become stronger since MOFCOM first announced the mechanism in 2019.

These entities can also be listed for discriminating against Chinese companies. This is the first time China has raised any violation of international economic and trade rules as grounds for putting a foreign entity on the list. This is an important concept, particularly given that the World Trade Organization recently ruled that the United States violated international trade rules in the trade war with China.

Many questions were left unanswered by the new provisions, including how to treat Chinese subsidiaries of foreign companies and foreign subsidiaries of Chinese companies. Considering the intertwined nature of multinational corporations, this distinction will be very important in practice.

The path to getting off the list is not clear

MOFCOM will be establishing an interagency “working mechanism” that will determine who and when to list entities. An entity may be included in the Unreliable Entity List either by petition from a third party or on the working mechanism’s own initiative. The office can carry out an investigation prior to listing an entity, but it is not a prerequisite. According to the regulations, “if facts are clear,” the office can list an entity without an investigation or warning. This “clear facts” authority also suggests broad discretion that could be worrisome for foreign companies.

There appears to be some potential for recourse, though the process seems half-baked at the moment.

Like the United States’ Entity List system, entities may be removed from the Unreliable Entity List if they correct the behavior that landed them on the list or if the reasons for being included on the list are no longer applicable. The foreign entity can also apply to be removed, but it is still unclear how this system will work.

What happens once a company is listed?

Being listed has the ability to severely damage a company’s competitiveness in China. Here are some of the potential punishments:

  • Restricted import and export activities related to China;
  • Restricted investment in China;
  • Restricted entry of related personnel, transportation vehicles, etc.;
  • Restricted or cancelled work permits, stay, or residence qualification of relevant personnel in China;
  • Fines;

This is not an exhaustive list, and importantly, the provisions include that the government can also take “other necessary measures.” Entities will be given a grace period to correct allegedly harmful behavior before the punishments kick in.

At its core, placing an entity on the list is meant to notify the public that the entity is at risk of being unreliable. Chinese companies will therefore be required to apply for a license to do business with companies on the Unreliable Entities List, similar to the US Entity List setup.

Tough times ahead for multinational companies

The Unreliable Entity List could be a double-edged sword for China. On one hand, China now has a legal mechanism to counter what it sees as a technical blockade and suppression of China and its companies by the United States. On the other, putting companies on the Unreliable Entity List simply for complying with US policies that China perceives to be discriminatory—for example, requirements to cut off supply to Huawei and its subsidiaries—may not actually help China change US policy to work in its favor. Rather, China may risk pushing those businesses even further away from the Chinese market. In either case, companies will be caught in the crossfire.

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Yuanyou (Sunny) Yang is an attorney who focuses her practice on international business matters and trade. Her practice includes negotiating and structuring business transactions and overseeing legal operations for Chinese companies doing business in the United States, as well as assisting US companies in pursuing investment opportunities in China. Read her full bio here.

Posted by Yuanyou Yang