This spring, the U.S. District Court for the District of Columbia issued two preliminary injunctions blocking the designations of Xiaomi Corp. and Luokung Technology Corp., Chinese technology companies, as Communist Chinese Military Companies (CCMC). A CCMC designation bars Americans from investing in such companies pursuant to a November 2020 executive order. The court issued the injunctions finding that the Department of Defense (DOD) had not adequately explained the reasons supporting its designations, in violation of the Administrative Procedure Act (APA). As a result, the DOD recently removed Xiaomi’s designation, creating uncertainty regarding the designations of other CCMCs, which may undermine U.S. efforts to target China’s military-civil fusion strategy.


While Congress authorized the designations of CCMCs more than two decades ago, the authority that accompanied it laid dormant for years. Congress first contemplated CCMCs in the 1999 National Defense Authorization Act (NDAA) amid growing concerns of U.S. re-engagement with China and the 10th anniversary of the Tiananmen Square massacre. Section 1237 of the 1999 NDAA authorized the president to use his International Emergency Economic Powers (IEEPA) against CCMCs without first declaring a national emergency.

Despite this new statutory authority, the DOD did not publish the new CCMC list. Congress has pushed for various administrations to carry out the law, including by amending the statute several times. Most recently, Congress amended the definition of CCMC as any entity that is “directly or indirectly owned, controlled, or beneficially owned by, or in an official or unofficial capacity, acting as an agent of or on behalf of the People’s Liberation Army or any other organization subordinate to the Central Military Commission of the Chinese Communist Party,” or “identified as a military-civil fusion contributor to the Chinese defense industrial base; and [] engaged in providing commercial services, manufacturing, producing, or exporting.”

Given recent and increasing concerns regarding China’s military-civil fusion strategy, the Trump Administration began designating CCMCs in 2020. The DOD published the first list of designated CCMCs in June 2020 and has since released three additional tranches of CCMCs, the latest on January 14, 2021. In total, the administration designated 44 companies as CCMCs.

The ban on U.S. investment in CCMCs is now set to go into effect on May 27, 2021. Numerous Chinese companies have been removed from U.S. exchanges in recent months, including three telecommunications companies that are designated as CCMCs.

China’s Military-Civil Fusion Strategy

In November 2020, President Trump issued an executive order that aimed to address the threat from U.S. investments in CCMCs by blocking investments, either directly or via funds, in such companies. The EO found that

Key to the development of the [People’s Republic of China]'s military, intelligence, and other security apparatuses is the country's large, ostensibly private economy. Through the national strategy of Military-Civil Fusion, the PRC increases the size of the country's military-industrial complex by compelling civilian Chinese companies to support its military and intelligence activities. Those companies, though remaining ostensibly private and civilian, directly support the PRC's military, intelligence, and security apparatuses and aid in their development and modernization.

China’s control over private companies is well documented, but the degree to which the CCP directs any particular company is often opaque. Chinese law requires all entities—whether state-owned or ostensibly private—to advance Chinese military and economic goals. For instance, Chinese companies must enable the creation of party organizations among their employees by providing the “necessary conditions” for the activity of party organizations. Such organizations are required for companies with three or more Chinese Communist Party (CCP) members. In September 2020, the CCP issued new guidance calling for an increase in CCP ideology and influence in the private sector, indicating that the party intends to increase control over private companies via internal party organizations.

The CCP’s military-civil fusion strategy targets high tech sectors. According to the U.S. State Department, the CCP is “systemically reorganizing the Chinese science and technology enterprise to ensure that new innovations simultaneously advance economic and military development.”

Arbitrary and Capricious

In both Xiaomi’s and Luokung’s challenges to their designations, the DC district court determined that the companies were “highly likely” to succeed on their APA claims because the designations were arbitrary and capricious and made in excess of the authority Congress granted the DOD. After noting general deficiencies with the DOD’s memorandums that provided the factual basis for the companies’ designations, the court found that the DOD failed to demonstrate that they were “affiliated with” the Chinese military and defense establishment. Rejecting the government’s arguments that it should construe “affiliated with” as having “a common purpose” or “shared characteristics,” court found the term meant “effectively controlled by another or associated with others under common ownership or control.”  

With respect to Xiaomi, the DOD relied on two pieces of evidence to conclude it met the CCMC statutory criteria: that it invests heavily in 5G and AI, which are “essential to modern military operations,” and that it received an award from the Chinese Ministry of Industry and Information technology. Regarding Luokung, the DOD relied on five pieces of evidence that either demonstrate that it is involved in technologies “essential to modern military operations” or show that it partners  with organizations with ties to the PRC.

In both cases, the court found that the fact that “technologies have military applications as well cannot be enough to support a conclusion that [a company] is a CCMC” as “such an outcome could result in a situation where any Chinese company involved in technology that has alternative military uses could be designated as a CCMC.” The court also found that further record evidence of connections between the PRC and the companies was too attenuated to show that they were “affiliated with” the Chinese military.

What’s Next

To avoid future litigation, Commerce Department Former Assistant Secretary for Industry and Analysis Nazak Nikakhtar testified that Congress could consider amending the CCMC definition to give the DOD more flexibility and reduce its evidentiary burden. As Chinese laws require private company compliance with its military and foreign policy goals, a de jure rather than a de facto approach may be appropriate. Without amendment, the recent litigation shows that the APA’s substantial evidence requirement could bog down and potentially hinder the designation of CCMCs, which appears to be the opposite of Congress’s intention when it recently expanded the definition of a CCMC in last year’s NDAA. Congress could also consider amending the law by implementing a “reasonable cause to believe” standard like that used to designate a foreign company on the Department of Commerce’s Entity List.

There is generally bipartisan support for using existing authorities such as the CCMC list to target China’s military-civil fusion efforts. Commerce Secretary Gina Raimondo voiced support for the list during her confirmation hearing. U.S. Senator Tom Cotton said that the Biden Administration should, “defeat the Communist party’s attempts to use our judicial system against us.” While the Senate is considering legislation aimed at responding to China this week, the bill does not contain changes to the CCMC definition or designation process.