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The US Department of Commerce blacklisted 24 Chinese state-owned companies last week, including five CCCC dredging subsidiaries, for their roles in helping the Communist Party “militarise” outposts in the contested South China Sea. Photo: AFP

US sanctions over South China Sea will not affect blacklisted Chinese construction giant CCCC, company says

  • US last week blacklisted 24 Chinese state-owned companies for their roles in helping ‘militarise’ outposts in disputed parts of the South China Sea
  • China Communications Construction Company says it will conduct a deeper assessment to determine any unknown impacts

The dredging business of state-owned engineering giant China Communications Construction Company (CCCC) will not be adversely affected by fresh US sanctions, but questions remain as to whether there could be reputational damage to its Australian and US subsidiaries, including a marine engineering group in Texas.

On Wednesday, the United States Department of Commerce blacklisted 24 Chinese state-owned companies, including five CCCC dredging subsidiaries, for their roles in helping the Communist Party “militarise” outposts in the contested South China Sea.

The blacklist, known as the Entity List, which also includes about 300 other Chinese entities including telecom company Huawei, forbids US firms from doing business with the listed companies or exporting products to them unless they receive a special licence to do so.

CCCC, whose international investment arm is listed on the Hong Kong stock exchange, has since said in a statement that its five blacklisted subsidiaries, including the China Communications Construction Company Dredging Group, did not have any US business and would not be financially affected by the sanctions.

“According to the 2019 annual report, the new contract value and revenue of the dredging business accounts for approximately 6 per cent of the total new contract value and revenue of the company. The company mainly conducts the business of waterway dredging, land reclamation and environmental dredging domestically,” it said.

“The overseas dredging business accounts for a relatively small portion, and no dredging business is conducted in the US by the company.

“In addition, the core equipment for the dredging business of the company did not use any technology supplied by or imported from US enterprises.”

CCCC said, however, that it would conduct a deeper assessment of its business to determine any unknown impacts.

The sanctions follow the intensifying disputes between the two countries in the South China Sea, which has been cited as a flashpoint for possible military conflict. In 2016, satellite images showed a subsidiary of CCCC Dredging operating giant barges digging sand from the seabed and piling it onto remote coral atolls in the South China Sea, including Mischief Reef, Subi Reef and Fiery Cross Reef, which are also claimed by the Philippines and Vietnam.

While a direct impact would be unlikely, there were questions as to how CCCC’s foreign subsidiaries, including mid-sized Texas-based marine engineering group Friede & Goldman, would be able to trade with its parent company. CCCC did not respond to requests for comments on Friede & Goldman.

CCCC bought Friede & Goldman in 2010 from its Russian owner, United Heavy Machinery, for US$125 million.

The company is a designer of services and equipment for offshore oil and gas drilling rigs, particularly jack-up rigs and semi-submersibles. It also holds several patents in rig design, including the “Rack & Chock System” and jacking systems for offshore oil drilling.

It works closely with another CCCC subsidiary, offshore construction business Shanghai Zhenhua Heavy Industry (ZPMC) – which is not also not mentioned on the Entity List – by providing designs that complement ZPMC’s construction and engineering of offshore structures.

Its company profile online indicates it has projects in China, Singapore, India, Mexico and the Middle East. There were no indications of any dealings with the US.

“If it is not on the list, then it shouldn’t be affected,” said Nicholas Turner, a lawyer with Steptoe & Johnson and an expert on economic sanctions and export controls.

Describing the new blacklist of 24 companies as more of an “economic restriction” than a sanction, Turner said that if US companies were not trading with those on the list then they would not suffer ramifications. However, for subsidiaries such as Friede & Goldman, it might be worth watching if complications arise, he said.

Another company that could face backlash as a consequence of the US blacklisting was John Holland, one of Australia’s biggest engineering and construction firms, which is wholly owned by CCCC. While John Holland was not directly implicated, the association with the parent company’s blacklisting could undermine John Holland’s ability to win projects locally, experts said.

In particular, the CCCC’s blacklisting could be problematic given that the Australian federal government is increasingly interjecting itself in economic relations between state and local Australian governments and Chinese firms.

John Holland, which CCCC acquired from Leighton Holdings in 2015 for A$1 billion, is active in Australasia and Southeast Asia, with projects such as the State of Victoria government’s A$11 billion (US$8.1 billion) Melbourne Metro rail tunnel, but does not conduct business in the US.

It’s a ‘sanction’ in a definitional sense, but it’s more a targeted rule … and the companies specifically listed are only subjected to the restrictions in the US
Nicholas Turner, lawyer

Turner said an alarmist approach was not necessary, and that it was unlikely CCCC, John Holland or Friede & Goldman would suffer a sudden reputational hit, especially when many companies on the Entity List have been “chugging along” since being targeted.

“It’s a ‘sanction’ in a definitional sense, but it’s more a targeted rule … and the companies specifically listed are only subjected to the restrictions in the US,” Turner said. “The restrictions are more technical, and people tend to treat them that way.”

He called the sanctioning “a warning shot that signifies the US moving into a new phase in the South China Sea,” and added, “we would expect to see more sanctions on other countries” as well.

What ensues would likely be more diplomatic tensions between the two countries, rather than economic fallout for the CCCC or other companies such as China Electronics Technology (CETC), whose subsidiaries were also among the 24 newly blacklisted companies.

Another trade-sanction expert, who declined to be identified, said CCCC and other blacklisted companies would be inconvenienced only if they relied heavily on commodities, software or technology from the US.

However, the blacklisting of CCCC’s dredging companies and CETC – both heavily involved in China’s trade strategy known as the Belt and Road Initiative – could make things difficult for their belt and road partners who would have to avoid US companies on their projects, observers said.

According to political risk consultancy Eurasia Group, CCCC is involved in 923 projects in 157 countries, and its involvement has been used to determine whether a project is part of the belt and road network.

By Monday afternoon, CCCC’s share price had fallen about 5.3 per cent since just before the new entities were added. It had rebounded briefly on Friday amid reports that CCCC was close to acquiring a 30 per cent stake in Portugal’s largest builder, Mota-Engil.

This article appeared in the South China Morning Post print edition as: construction giant downplays sanctions impact