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Pentagon to Remove China’s Xiaomi From Blacklist After Lawsuit

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HONG KONG—The Defense Department has agreed to remove Xiaomi Corp. from a blacklist that prohibits U.S. investment in the Chinese tech giant, reversing course after a federal court had granted a temporary halt to the ban following a lawsuit by the company.

In a one-page filing in Washington, D.C., federal court Tuesday, lawyers for both sides said removing Xiaomi from the U.S. blacklist was appropriate following the company’s court victory in March, thereby avoiding additional litigation over the matter.

Xiaomi filed a lawsuit in January challenging the Pentagon’s decision to place it on its blacklist of companies with alleged links to China’s military. Xiaomi denied any such ties.

Shares of Xiaomi rose almost 6% in afternoon trading in Hong Kong following the disclosure.

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

The Pentagon’s move marks a retreat in its efforts to implement a Trump administration-era tool aimed at punishing collaboration between major Chinese companies and the country’s military, an initiative known as military-civil fusion. The department since last year has added dozens of companies in sectors including telecommunications, semiconductors and aviation to its blacklist of firms deemed to support China’s military.

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

A Xiaomi spokeswoman said the company is “paying close attention to the development of this issue.” The company has previously denied any affiliations with the Chinese military and says it sells products and services solely for civilian and commercial use.

Under an executive order signed by former President

Donald Trump

in November, addition to the list blocks any American company or firm from investing in securities issued by the listed company. The Pentagon added Xiaomi, China’s top-selling phone maker, on Jan. 14.

It wasn’t until after Xiaomi challenged its listing in federal court later that month that the Defense Department revealed its reasoning behind the listing. 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.

Judge

Rudolph Contreras

in March 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.”

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 blacklisting in light of Judge Contreras’s decision. They said they would propose a final order to the court no later than May 20.

The Pentagon was dealt another setback last week, after Judge Contreras ordered a temporary halt to the enforcement of its blacklisting of

Luokung Technology Corp.

, a Chinese mapping and big-data company.

Nonetheless, the U.S. is moving to enforce investment bans on other companies on the Defense Department list. 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.

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

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

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

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