Xiaomi & Chinese Censorship: Investment Ban Warranted

Lithuania’s new recommendation to toss Chinese smartphones is a lesson for the U.S.

In a bombshell announcement this week, Lithuania’s defense ministry announced that people should toss their Chinese cellphones: According to a report by the ministry’s cybersecurity division, devices sold by Xiaomi, a major Chinese smartphone company, are packaged with software that censors 449 phrases about sensitive political topics, including those pertaining to Tibet, Taiwan, and democracy.

There’s a broader story here about how this fits into Lithuania’s newly central role in resisting Chinese authoritarianism; the tiny Baltic country has thrown itself to the front lines of the resistance against the Chinese Communist Party’s assault on democracy. In just over a few weeks, Lithuania, like Australia and Taiwan, has transformed itself into a chief opponent of the Chinese Communist Party — and, incredibly, it’s done so from Eastern Europe.

But this news is important for an additional reason. Thanks to a recent court ruling, Americans can continue to invest in Xiaomi, despite its ties to the Chinese party-state as it exports its censorship regime around the world.

Xiaomi has rocketed to the top of the global smartphone industry. In June, for the first time, it became the world’s largest brand in terms of monthly smartphone sales, according to Counterpoint Research, and it is now the second largest smartphone company in the world. Although it’s not a household name, Xiaomi has two American subsidiaries and rakes in hundreds of millions from its U.S. operations.

Meanwhile, American officials have watched its rise warily. In January, the Pentagon added the company to its Communist Chinese military companies (CCMC) list — an investment blacklist created in 1999 but used for the first time only in the waning months of the Trump administration. Under Trump-era executive orders enforcing the 1999 law, designated firms are blocked from U.S. exchanges, and Americans are required to divest from them.

The investment ban did not take immediate effect after the January designation, but Xiaomi’s stock plunged about 10 percent, and major banks announced they would stop trading in shares of the company when the order would have taken effect on March 15 this year. Index provider FTSE Russell removed Xiaomi from its indexes on March 12.

But Xiaomi’s lawyers eventually won the day. They sued to prevent the Defense Department from going forward with the designation, first obtaining an injunction against implementing the designation and the resulting investment ban in February, which led the Pentagon to drop its defense of the designation in May.

Xiaomi had argued, successfully, that the ban was arbitrary and capricious and on shaky ground because the Pentagon failed to prove Xiaomi’s affiliation with the People’s Liberation Army or with the defense-industrial base of the People’s Republic. At the time, I wrote that the definitions included in the 1999 law were far too restrictive to effectively address the Chinese party-state’s heavy-handed approach to dealing with nominally private firms. Xiaomi, like all major Chinese companies, operates an internal party committee dedicated to guiding the company by the tenets of Xi Jinping Thought and other facets of party ideology.

More important, the CCMC designation might even have been defensible under the requirements of the law. For one, as the Pentagon pointed out, Xiaomi founder and CEO Lei Jun received an award from a government ministry involved in Chinese military-civil fusion efforts, and his company deals in “technologies essential to modern military operations,” such as 5G and artificial intelligence.

But the Pentagon’s lawyers didn’t point out that Lei was previously the CEO of Kingsoft, a well-connected Chinese software company that was initially formed at the behest of a party military commission, as Jennifer Zeng, a Chinese human-rights advocate, has explained. He retains his Kingsoft ties and is involved in ventures with ties to party-organized satellite-development projects. The Pentagon’s lawyers could have argued that point, about Lei’s military ties, but it doesn’t seem as if they were aware of it. So the judge, Rudolph Contreras, was less amenable to upholding the investment ban than he should have been. In any event, U.S. officials’ insistence that Xiaomi’s focus on emerging technologies could well be co-opted by the PLA should have been enough to meet the legal threshold for the ban.

With the Lithuanian government’s announcement, it’s clear that in addition to Xiaomi’s links to the Chinese military, censorship is another reason to target Xiaomi with sanctions.

The Biden administration recently overhauled U.S. CCMC designations and other categories of designations targeting Chinese military-industrial companies, replacing the old system with a new list that targets military and surveillance companies. Officials say that this process is ongoing and that new companies will be added. As it strikes a more assertive stance on these investment bans and similar issues, the administration should consider Xiaomi a prime candidate for an investment ban, and Congress should, as House conservatives have proposed, expand the definition of what qualifies as a Chinese military company subject to these bans.

There’s also a lesson in all of this, as relatively new U.S. tools for competition with China are polished. The revelations out of Lithuania vindicate the Pentagon’s initial defenses of the Xiaomi investment ban, and they call for an even tougher approach now.

Participants in China’s campaign to fuse military and civil entities were able to exploit America’s commitment to due process to the detriment of U.S. national security, all but ensuring that Americans would help spread and pay for China’s censorship regime. Pentagon lawyers mounted a defense that failed, a credulous judge sided with a company that has significant ties to Beijing’s military, and the Biden administration seems to have given up on finding a solution. That can’t happen again.