Chinese Military-Civil Fusion and Section 1260H: Congress Incorporates Defense Contributors

One provision of the William M. (Mac) Thornberry National Defense Authorization Act (NDAA) for fiscal year 2021 requires the U.S. Department of Defense to publish an annual list of “Chinese military companies” (CMCs). Secretary of Commerce Gina Raimondo referenced the provision, Section 1260H, during her confirmation process as a way to handle the “substantial challenges China’s military-civil fusion policy poses to U.S. national security.” But while the 2021 NDAA required the list to be published starting on April 15, the report has not yet been released.

This post takes a deeper look at the specific language of Section 1260H, examines what the Defense Department’s inaugural CMC report might look like once it is released, and assesses Section 1260H’s implications for the overall mosaic of U.S.-China relations.

Background and Text of Section 1260H

As one of us has explained previously, Congress passed Section 1237 of the NDAA for fiscal year 1999 to ensure Americans would know whether their tax dollars were “funding the People’s Liberation Army.” Congress directed the Defense Department to identify “Communist Chinese military companies” (CCMCs) operating in the United States through a publicly published list. Section 1237 was amended twice: once to change its reporting requirements, and once again to increase its scope. Section 1260H seeks to build on the foundation laid by Section 1237 (as amended) by creating an entirely new reporting framework to pinpoint companies connected to the Chinese military.

Reporting Requirements

According to the official summary of the amendment, Section 1260H—introduced during the House Armed Services Committee markup process by Rep. Liz Cheney, and included as part of an en bloc amendment to the 2021 NDAA—“extends and modernizes” the Defense Department’s reporting requirements regarding “Chinese Communist Party military companies operating in the United States.”

The amendment instructs the secretary of defense to publish a list of CMCs in the Federal Register, while also allowing for a classified version of the list. The provision specifies that the list must be submitted annually to the congressional armed services committees by April 15, 45 days after the secretary is required to deliver the CCMC report under Section 1237. This requirement to submit an annual CMC list sunsets on Dec. 31, 2030.

The provision does not require the secretary of defense to consult with other executive branch officials before publishing the CMC list. It merely suggests that they do so. The secretary is required to submit the report to the heads of each “appropriate” federal agency after it is completed.

Section 1260H works in tandem with Section 1237 to create a parallel reporting framework for identifying CMCs. In creating this new framework, Section 1260H does not just duplicate the terms of Section 1237; instead, the new provision uses a more targeted and nuanced approach, which can be seen in how it defines relevant terms.

Definitions

Section 1260H provides new definitions for the People’s Liberation Army (PLA) and for what constitutes a company connected with the Chinese military, which differ significantly from Section 1237.

Starting with the PLA, both Section 1260H and Section 1237 define the PLA to cover the “land, naval, and air military services” of China. But that is where their similarities end. While the definition of the PLA from the 1999 NDAA explicitly includes “the police, and the intelligence services of ... China,” the definition provided in Section 1260H does not. Instead, it mentions “any other related security element within ... China,” as defined by the secretary of defense, after listing specific military services: the People’s Armed Police, the Strategic Support Force and the Rocket Force.

These specific military services are all under the jurisdiction of the Chinese government’s Central Military Commission. The intelligence services—the Ministry of State Security (MSS) and the Ministry of Public Security (MPS)—by contrast, are under the jurisdiction of the Central Political and Legal Affairs Commission. The MSS and MPS could both be considered Chinese “security elements,” but the plain text of the law does not make this distinction.

Because of the separation of authority within China’s security structure, the change of definition is potentially problematic if U.S. policymakers meant to target intelligence operations. But the new definition in Section 1260H likely means that Congress, in supplementing the Defense Department’s obligations under Section 1237, is particularly concerned about the Chinese military and its operations in the United States, rather than the Chinese state broadly.

Turning to the definition of a CMC, there are a few notable changes. After clarifying that CMCs are not “natural persons,” the provision explains that a CMC includes any company that is:

1. directly, indirectly, or beneficially owned, controlled or acting on behalf of the People’s Liberation Army or any other organization subordinate to the Central Military Commission, or that is identified as a “military-civil fusion contributor” to China’s defense industrial base; and
2. engaged in providing commercial services, manufacturing, producing, or exporting[.]

This definition of a CMC is significant for a few reasons. First, it more accurately reflects the chain of command in China. As part of his reforms of overall Chinese society, in late 2015 and early 2016, Chinese Communist Party General Secretary Xi Jinping enacted a wide-ranging restructuring of the PLA to further centralize his control over the military, and to enhance the interoperability and jointness of the Chinese military services.

These changes have been compared to the reforms advanced under the Goldwater-Nichols Department of Defense Reorganization Act of 1986, when Congress restructured military authority to flow from the president and secretary of defense down to combatant commanders charged with leading joint forces within specific regional theaters. Under China’s new centralization of authority, the Central Military Commission under Xi has virtually total control over every aspect of China’s military.

The definition is also significant because Section 1222 of the NDAA for fiscal year 2005 amended Section 1237 to cover entities affiliated with any ministry of the People’s Republic of China. But, in the new law, the language only specifies organizations subordinate to the Central Military Commission. In this sense, Congress’s new definition of a CMC is significantly narrower than the old definition of CCMCs under Section 1237. This may allow for the more effective targeting of military-affiliated organizations under a parallel reporting framework. Just as with the definition of the PLA, Congress’s focus is more on China’s military than the entire Chinese state.

Even as the provision adopts a more focused definition of a CMC overall, it adds a new class of companies to tailor it even further.

Military-Civil Fusion Contributors

As noted above, the new amendment creates a novel definition of a Chinese military company for the purposes of targeting companies that are specifically connected to the armed forces of China and the Central Military Commission. Additionally, it creates an entirely new class of companies to categorize companies that have more specific connections to the Chinese military: military-civil fusion contributors (MCFCs) to China’s defense industrial base.

China’s military-civil fusion (MCF) development strategy aims to bridge the gap between the civilian and defense spaces in China via a whole-of-society approach, especially when it comes to technological development. This strategy ensures that innovation advances the country’s economic and military development simultaneously. Beijing’s MCF strategy has incentivized new methods of and avenues for cooperation between the civilian and defense sectors, resulting in collaborations, partnerships and business transactions that do not fit neatly within the scope of traditional defense contracting.

Creating a new MCFC class of CMCs captures these nontraditional relationships that present challenges to U.S. national security and economic competitiveness. All but one of the eight categories below target specific programs, processes or ministries within China that focus either on the military, technology or both:

(A) Entities knowingly receiving assistance from the Government of China or the Chinese Communist Party through science and technology efforts initiated under the Chinese military industrial planning apparatus;

(B) Entities affiliated with the Chinese Ministry of Industry and Information Technology, including research partnerships and projects;

(C) Entities receiving assistance, operational direction or policy guidance from the State Administration for Science, Technology and Industry for National Defense;

(D) Any entities or subsidiaries defined as a ‘‘defense enterprise’’ by the State Council of the People’s Republic of China;

(E) Entities residing in or affiliated with a military-civil fusion enterprise zone or receiving assistance from the Government of China through such enterprise zone.

(F) Entities awarded with receipt of military production licenses by the Government of China;

(G) Entities that advertise on national, provincial, and non-governmental military equipment procurement platforms in the People’s Republic of China; or

(H) Any other entities the Secretary determines is appropriate.

The last category in the class of MCFCs leaves a great deal of discretion to the secretary of defense. However, given that this category comes after a list of more specific categories, the canon of legal interpretation known as eiusdem generis (“of the same kind”)—which provides that when a law lists a class of persons or things, any general language after it is interpreted in line with that list—will likely guide its use.

The (Potential) CMC List

Given that Sections 1260H and 1237 have key definitional similarities when it comes to their focus on the Chinese military, it is possible that the list provided under Section 1260H will resemble the list provided by the Defense Department earlier this year under Section 1237.

Much of the Section 1237 CCMC list includes state-owned enterprises (SOEs) that have already been sanctioned under other authorities, such as the China International Engineering Consulting Corporation (which is sanctioned under Executive Order 13692) and the China Communications Construction Company (which is sanctioned as part of the Commerce Department’s Entity List). A number of these companies are connected to either China’s Belt and Road Initiative or its activities in the South China Sea. Other SOEs, such as the Commercial Aircraft Corporation of China, have been identified as being closely connected with military-industrial research institutes by Chinese government reports.

Nearly 20 percent of the list, and the majority of the companies listed in the first and second tranches of Section 1237 CCMCs, fall under the heading of “defense enterprises” as specified under 1260H(d)(2)(D), including the Aviation Industry Corporation of China, the China Aerospace Science and Technology Corporation, the China Aerospace Science and Industry Corporation, the China Electronics Technology Enterprise, the China Nuclear Engineering and Construction Corporation, the China National Nuclear Corporation, the China State Shipbuilding Corporation (CSSC), the China Shipbuilding Industry Corporation (CSIC) and the China North Industries Group Corporation.

These company names seem to come straight from a 2009 report entitled “China’s Defense Industry on the Path to Reform” authored by the U.S.-China Economic and Security Review Commission. The CCMC list even includes both CSSC and CSIC, despite their 2019 merger and adoption of CSSC’s name.

It’s unclear what the final list will look like, but the Section 1260H CMC list, once released, may actually be narrower than the Section 1237 CCMC list. Some companies that qualify as CCMCs due to their connections to the Chinese state, intelligence services or police would not qualify as CMCs under Section 1260H due to its focus solely on the Chinese military. Thus, distinctions between entities on either list might help to identify the companies that the Defense Department deems to fall under military, intelligence or police jurisdiction in China.

It remains to be seen what executive action the Biden-Harris administration will take if and when the CMC list is finally published. As one of us pointed out previously, the Trump administration likely wanted to maintain maximum flexibility when it targeted CCMCs under Section 1237, leading it to declare a national emergency and employ the broad authority provided by IEEPA (rather than simply using its authority under Section 1237(a)(1) without an emergency declaration). That decision means that the Biden-Harris administration could simply amend the Trump-era executive orders (13959 and 13974) to incorporate the Section 1260H CMC list by reference. But absent further executive action, Section 1260H is still likely to have a large impact simply by “naming and shaming” CMCs.

Implications for the U.S.-China Relationship

Strategic Targeting of Chinese Behavior

Section 1260H appears to be one piece of an ever-increasing mosaic of “naming and shaming” efforts by the United States vis-a-vis China, often in conjunction with more substantive action. Other pieces of this mosaic include the executive branch’s strategy of using indictments to call out malicious Chinese cyber behavior—as Deputy Attorney General Lisa Monaco made clear in a 2016 interview and Assistant Attorney General John Demers echoed in 2019—and the State Department’s consistent chastising of China over its lack of respect for human rights (most recently in regard to the abhorrent treatment of the Uighurs in Xinjiang).

In the context of Chinese military companies, Congress began assembling this mosaic more than 20 years ago with Section 1237, which combined a sanctions regime with a “naming and shaming” regime. Congress likely intended the executive branch to take advantage of the sanctions authority once the “naming and shaming” had taken place. But since the Defense Department did not release a list of CCMCs until June 2020, no action was taken to sanction any Chinese entities until November 2020.

But now that sanctions have been levied, Congress may not have included a sanctions regime with Section 1260H because the president can simply amend the existing CCMC executive orders to cover CMCs under his IEEPA authorities. Instead, Section 1260H focuses on strengthening the “naming and shaming” foundation laid by Section 1237 through a parallel reporting framework.

More importantly, Section 1260H’s narrow and tailored language likely demonstrates the U.S. government’s desire to call out the specific issue of Chinese military companies and China’s MCF development strategy from a more precise and up-to-date angle. As previously stated, the new language reflects a better understanding of the 2015/2016 PLA reforms and the role of the Chinese military under the Chinese Communist Party. Moreover, the inclusion of the “military-civil fusion contributors” subcategory gives the Defense Department another avenue to define Chinese entities that are connected to China’s military and defense apparatus.

Even so, some aspects of Section 1260H’s designation authorities remain intentionally or unintentionally ambiguous due to broad drafting. For instance, in addition to the broad discretion provided to the secretary of defense in Section 1260H(d)(2)(H), Congress’s continued use of the term “affiliated with”—which echoes the language in Section 1237—is likely meant to capture a broad variety of relationships between alleged CMCs and the Chinese military. But the continued litigation around this issue in the context of Section 1237 and CCMCs demonstrates that, as both a practical and a legal matter, the concept of “affiliation” is difficult to pin down. More precise terms—or the adoption of a specific definition for that term—might help clear this up.

Other MCF Programs

Invoking MCF as a tool to shape U.S. policy has its pros and cons. In some instances, it can be a constructive way to scope policies. For instance, President Trump issued the May 2020 “Presidential Proclamation on the Suspension of Entry as Nonimmigrants of Certain Students and Researchers From the People’s Republic of China.” The order appears to limit visas only for graduate-level students and scholars from China’s Seven Sons of National Defense (SSNDs)—a group of seven Chinese universities under the supervision of the Ministry of Industry and Information Technology (MIIT). These institutions have historically intimate connections to the defense industry and the PLA, and their activities are often viewed as a manifestation of China’s MCF strategy.

Operating under this assumption, research from the Center for Security and Emerging Technology at Georgetown University estimates that 3,000 to 5,000 students are subject to these visa restrictions, representing 1 percent of all Chinese students in the United States and about 20 percent of those annually enrolled in graduate-level STEM programs.

While the order has been maligned by some as self-defeating and potentially racist, as of April, the Biden-Harris administration has not rescinded it, likely because it is still cycling through its comprehensive review process. Once this review process is complete, it is entirely possible that the SSNDs will be designated as CMCs, both under Subsection (d)(2)(D) for their affiliation with the MIIT, and under Subsection (d)(1)(A) for their support for PLA programs by manufacturing and producing advanced technology (as referenced by the Commerce Department’s Entity List).

Moving forward, attempts to use MCF to justify policies must remain as specific and targeted as possible to maintain U.S. credibility on the subject. MCF invoked in indiscriminate or sloppy ways—such as bills targeting Chinese STEM students en masse or the designations in the ongoing CCMC litigation—may open up the United States to additional legal challenges and countermeasures from Chinese entities that find themselves on the receiving end of such policy measures.

Conclusion

Chinese leaders have advanced the MCF policy since Mao Zedong. Despite its long development, it has just recently taken on a new cachet within the halls of the executive branch and Congress. By building on the foundation of Section 1237 of the NDAA for fiscal year 1999, Congress has indicated that it intends to continue the effort begun by former Sens. Tim Hutchinson and Spencer Abraham: to address “the growing threat that the People’s Republic of China poses to the citizens of the United States.” It is also seeking to use this “naming and shaming” effort to push the executive branch into substantive action, including by codifying the Trump-era IEEPA sanctions into law under the American Financial Market Integrity and Security Act recently introduced in both houses of Congress.

As mentioned, the president could use the existing sanctions authority to incorporate the new CMC list. But it is not yet clear how the Biden-Harris administration will choose to move forward with MCF-related policies overall, particularly when it comes to sanctions. Many of the technology and export control-related positions in the executive branch are filling up, giving a better idea of the trajectory of U.S.-China relations for the next four years. The announcement of the president’s intent to nominate C.S. Eliot Kang as assistant secretary of state for international security and non-proliferation (ISN) is the latest example, as ISN plays a significant role in export control policies, particularly as they relate to the proliferation of weapons of mass destruction and related components.

However, key positions, like the undersecretary of commerce for industry and security, as well as numerous assistant secretary posts, remain vacant. Since the Commerce Department’s Bureau of Industry and Security has recently been deemed “the agency at the center of America’s tech fight with China” by the New York Times, how the administration decides to fill these openings will say a lot about the president’s intentions in handling these issues.