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Pentagon Backs Off Xiaomi Blacklisting After Legal Challenge

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HONG KONG—The U.S. Defense Department agreed to remove Xiaomi Corp. from a blacklist banning U.S. investment in the Chinese tech giant, opting against further defending a Trump administration action that alleged ties between the smartphone maker and the Chinese military.

The retreat comes two months after Xiaomi won a key victory in a federal lawsuit challenging the listing, in which a Washington, D.C., judge criticized the Pentagon’s rationale for the move and ordered a temporary halt against its enforcement.

In a one-page legal filing on Tuesday, lawyers for both Xiaomi and the Pentagon said the company’s removal from the blacklist was appropriate following the judge’s order. Shares of Xiaomi ended 6.1% higher in Hong Kong following the announcement.

In agreeing to delist Xiaomi, the Pentagon signaled a willingness to walk away from a sustained fight over one of the Trump administration’s final actions against a major Chinese tech company. Xiaomi joins a small but growing list of Chinese tech companies including the owners of Chinese social-media apps TikTok and

WeChat

that have successfully won courtroom reprieves against Trump-era actions.

In an emailed statement, a spokeswoman for the National Security Council said: “U.S. courts found that the Trump administration failed to develop a legally sufficient basis for imposing restrictions on the company and compelled this action. The Biden administration is deeply concerned about potential U.S. investments in companies linked to the Chinese military and is fully committed to keeping up pressure on such companies.”

Representatives for the Defense Department didn’t immediately respond to requests for comment.

A Xiaomi spokeswoman said the company was monitoring the issue, which still requires final negotiations with the Pentagon to implement the court order. The company has previously denied any affiliations with the Chinese military and says it sells products and services solely for civilian and commercial use.

The Pentagon’s sanctions are aimed at punishing collaboration between big Chinese companies and the country’s military, an initiative known as civil-military fusion.

Under an executive order signed by former President

Donald Trump

in November, addition to the list blocks any American company from investing in securities issued by the listed company. The Trump administration added dozens of companies in sectors including telecommunications, semiconductors and aviation to its blacklist.

The tech battle between the U.S. and China has battered TikTok and Huawei and startled American companies that produce and sell in China. WSJ explains how Beijing is pouring money into high-tech chips as it wants to become self-sufficient. Video/Illustration: George Downs/The Wall Street Journal

Only after Xiaomi challenged its listing in federal court in January did the Defense Department reveal its reasoning behind the action. Officials cited an award given to company founder and Chief Executive

Lei Jun

for his service to the Chinese state in 2019, as well as its ambitious investment plans to develop advanced technologies such as 5G and artificial intelligence.

In legal filings, Xiaomi said the evidence offered by the U.S. didn’t prove ownership by or affiliation with the Chinese military.

In March, Judge

Rudolph Contreras

ordered a temporary halt to the enforcement of the investment ban, saying that the Pentagon had provided insufficient evidence to deem Xiaomi a military company. The judge called the firm “a publicly traded company that produces commercial products for civilian use, [which] is controlled by its independent board and controlling shareholders.”

Last week, the same judge overseeing the Xiaomi case ordered a similar halt to the Defense Department’s enforcement of its blacklisting of

Luokung Technology Corp.

, a Chinese mapping and big-data company, after that company filed a lawsuit challenging its designation.

Other legal setbacks for officials include decisions by two federal judges last year to issue temporary halts to a ban on U.S. downloads of the Chinese social-media app TikTok, saying the U.S. overstepped its authority. U.S. officials also shelved efforts to force TikTok’s Chinese owner Bytedance Ltd. to sell off its American business to U.S. buyers after legal challenges by Bytedance.

Separately, a California federal judge last year blocked a Trump executive order restricting Americans’ use of the popular Chinese social-media app WeChat, a victory for its owner, Tencent Holdings Ltd., and a group called the U.S. WeChat Users Alliance, the nonprofit organization that challenged the executive order.

“The long and the short of it is the Trump administration did some things near the end that haven’t held up,” said Nick Turner, a lawyer with Steptoe & Johnson in Hong Kong, who advises companies on economic sanctions. Chinese companies “are seeing more and more an opportunity to pursue relief through U.S. federal courts, when before they may not have had an opportunity to do so.”

To be sure, President Biden has signaled plans to maintain an assertive line on China, and hasn’t indicated it will roll back other Pentagon moves to sanction entities.

Last week, the New York Stock Exchange applied to the Securities and Exchange Commission for permission to delist the American-listed shares of China’s big three telecom carriers,

China Mobile Ltd.

,

China Unicom (Hong Kong) Ltd.

and

China Telecom Corp.

, following their addition to the Pentagon list.

The move, which came after unsuccessful appeals by the carriers, put the companies on track to be delisted by next week.

The Trump administration also had applied export restrictions to numerous companies, forcing them to reorder supply chains or in some cases curtail operations. Among the hardest hit is telecom giant Huawei Technologies Co., whose sales of smartphones have plummeted since being slapped with export restrictions.

Xiaomi has been one of the biggest beneficiaries of Huawei’s woes. Shipments of its smartphones soared 65% in the first quarter, while its stock price has more than doubled over the past year, though it has retreated significantly from a high before the Pentagon action at the start of 2021.

The Defense Department’s decision to sanction Xiaomi caught many observers of Chinese tech companies by surprise given the company’s focus on smartphones and other consumer gadgets. Unlike its rival Huawei, Xiaomi doesn’t build telecommunications equipment or other sensitive infrastructure.

In the agreement announced by Xiaomi and the Pentagon on Tuesday, the two sides said they would negotiate the terms of a final order vacating Xiaomi’s designation in light of Judge Contreras’s decision. They said they would propose a final order to the court no later than May 20.

Write to Dan Strumpf at daniel.strumpf@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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