China aviation giant now in Trump's crosshairs

FPI / October 23, 2020

Commentary by Jason Orestes

The U.S. has been providing long overdue reciprocity to China over the last four years. It’s been mostly trade-based over the first three years, with tariffs as the main tool.

However over the last year it has turned more clinical, systematically taking a scalpel to specific Chinese companies that represent unique threats instead of certain products that cross borders.

Huawei has become something of an international pariah after a U.S. 5G ban led to subsequent bans in India, the UK, Singapore, Denmark, Poland, Japan, Australia, Estonia, and led Germany and France to reassess just how much they value low-cost infrastructure over security.

Soon after, the U.S. added ByteDance (owner of TikTok) and WeChat (owned by Tencent) to the prohibited list for data privacy issues. These companies must submit to the Chinese military on command, and the swathes of U.S. consumer data they harvested was unacceptable.

The U.S. has recently placed SMIC, China’s largest semiconductor company, on a list of entities that require special permission for U.S. companies to do business with. This doubles as both a national security issue as well as a strategic move to maintain chip manufacturing dominance over Beijing.

These are all proportionate responses to decades of blatant Chinese mercantilism and demonstrates the holistic approach the Chinese hawks in the White House are taking to the CCP.

I suspect this trend will continue, and another prominent Chinese company may now be in U.S. crosshairs.

Aviation Industry Corporation (AVIC) is a CCP-owned enterprise with over one hundred subsidiaries and China’s crown jewel military aerospace provider. It’s a critical element for China’s unrelenting quest to become a military and industrial dominating force and employs more than both Boeing and Airbus combined. While weapons of war are its core business, it also makes civilian products and is known to partner with U.S. companies.

The Trump administration placed AVIC on a list of firms controlled by the Chinese military back in June. With the U.S.-Beijing relationship continuing to deteriorate, and anti-Chinese sentiment at all-time highs due to Wuhan-originating Covid-19, this seems like a ripe target for new restrictions.

To provide some scope on just how large AVIC is: they did about $69 billion in revenue in 2019. For a military contractor this is a lot, and is more than U.S. giants like Northrop Grumman or Lockheed Martin.

There are however numerous companies on the Chinese-military-controlled list, so why target AVIC? While anyone on the list may be susceptible to some form of sanction, what makes AVIC more likely is that it actually has partnerships with U.S. companies.

Its joint venture with Honeywell focuses on flight-control software and hardware. It works with General Electric to create avionics products. And it’s partnered with Textron to build business jets. All of this and its other U.S. ventures can be ended under the guise of national security.

The CCP can compel any Chinese company to work with the government and military at its whim. China hawks could make a credible argument that partnering with a Chinese company is de facto partnering with Chinese government; and it’s not much of a stretch. The overarching sentiment towards China is that of decoupling, and focusing on AVIC fits with this theme.

Just like the U.S. proselytized its allies to reject Huawei, it could also do so with AVIC. AVIC works with several European aerospace companies like Airbus and Safran, and those partnerships could be jeopardized, depending on how hard a line the U.S. takes.

The Trump administration has also started focusing on weakening business partnerships that directly help the PLA. With AVIC spending nearly $3.5 billion on 20 engineering and aerospace businesses in the U.S. and Europe, and a simple CCP phone call away from being compelled to help the Chinese military, one could easily see AVIC being earmarked under a more strategic, SMIC-type ban instead of the “national security” banner. If Trump gets a second term, I would not be bullish on AVIC’s prospects in the U.S.

Jason Orestes (@market_noises) is a former Wall Street financial analyst who focuses on contemporary political developments affecting economics, markets, and culture. His commentary can be found on Washington Examiner, TheStreet, MSN Money, RealClearMarkets, and RealClearPolitics.

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