FY2026 National Defense Authorization Act (S. 1071): The New Global Market Order Under Capital Diversion and Technological Containment

Chapter 1 Executive Summary: Geopolitics and the Structural Fracture of Capital Markets

On December 18, 2025, as U.S. President Donald Trump officially signed the S. 1071 bill, the National Defense Authorization Act for Fiscal Year 2026 (NDAA FY2026), global capital markets and U.S.-China economic relations officially entered an irreversible new era of "structural bifurcation" ¹. While legally it appears to be merely an annual appropriations bill authorizing over $900 billion in defense spending, in substance and long-term impact, S. 1071 is effectively a comprehensive "economic warfare and industrial policy playbook." It not only marks a decisive shift in U.S. strategy toward China from "de-risking" to "strategic bifurcation" but also codifies this geopolitical intent into hard constraints on capital flows.

For investors in Hong Kong (HKEX) and U.S. stock markets, the enactment of this bill signifies a fundamental restructuring of investment logic. The final inclusion of the BIOSECURE Act, despite the removal of specific company names in the text, effectively initiates a "de-Sinicization" process for the global pharmaceutical supply chain, forcing multinational pharmaceutical companies to divest and replace their reliance on China's leading CDMO firms (e.g., WuXi AppTec, BGI) within seven years ³. Meanwhile, the passage of the Comprehensive Outbound Investment National Security Act (COINS Act) heralds the end of the era of "passive investment" by U.S. capital in China's technology sectors (AI, quantum computing, hypersonics), with index funds, private equity (PE), and venture capital (VC) facing unprecedented compliance purges ⁵.

However, the market's initial reaction to the bill's signing—particularly the "bad news exhaustion" rebound in WuXi-related stocks—may severely underestimate the hidden risks of administrative discretion. While lawmakers employed more subtle legislative techniques to avoid the constitutional risk of a "Bill of Attainder," the actual exclusionary strike capability of the administrative designation mechanism established through the White House Office of Management and Budget (OMB) and the Department of Defense's 1260H list has not diminished. Instead, its dynamic adjustment feature makes it even more potent ⁷.

This report will provide a detailed dissection and analysis of the S. 1071 bill based on extensive legislative texts, congressional records, and market data. We will delve into its impact on biotechnology, the defense industrial base, and the semiconductor industry, while dissecting potential countermeasures from Beijing (e.g., critical mineral export controls), offering institutional investors a strategic guide to survival and profit in the era of "Great Bifurcation."

Chapter 2 Legislative Architecture: Legal Force and Strategic Intent of S. 1071

2.1 The "Must-Pass" Legislative Vehicle

The National Defense Authorization Act (NDAA) is known in Washington political parlance as a "must-pass" legislative vehicle. Because it governs military pay, equipment procurement, and base operations, no political party dares to obstruct its passage, making the NDAA an ideal "Trojan horse" for controversial policy riders. The FY2026 NDAA (S. 1071) is particularly unique, as it is the product of a rare bipartisan consensus on a hardline China stance in the 119th Congress. From the original House version (H.R. 3838) to the Senate version (S. 2296) and finally the reconciled S. 1071, the legislative process demonstrates how U.S. lawmakers translate national security concerns into concrete economic control tools ⁸.

2.2 Inter-Chamber Bargaining and the Final Text

During the conference committee stage, the House and Senate did not reach consensus on all China-related provisions. The most notable deletion was the removal of the **"GAIN AI Act,"** which originally mandated that U.S. chipmakers (e.g., Nvidia, Intel) prioritize domestic orders before exporting overseas. Its exclusion stemmed from internal White House opposition, arguing that excessive export restrictions could harm the global market share and R&D capital repatriation of U.S. tech giants ⁹. This detail reveals a delicate balancing act in the 2.0 Trump administration: restricting China's access to technology while avoiding "self-harm" to domestic industries.

However, this balance did not extend to biotechnology and capital control domains. In these areas, the final text retained highly aggressive provisions, with some definitions even stricter than earlier versions. The signing of S. 1071 marks the official escalation of U.S. strategy toward China from a "tariff war" to a "capital and supply chain blockade war."

Chapter 3 The BIOSECURE Act: Structural Decoupling of the Life Sciences Supply Chain

The passage of the BIOSECURE Act is one of the most market-sensitive highlights of S. 1071. Its core logic leverages the U.S. government's massive procurement power to force the global pharmaceutical industry to choose between "the U.S. market" and "Chinese supply chains."

3.1 The Legal Game of "Naming" vs. "Not Naming"

The market's initial reaction to the bill's signing was "relief," as early drafts explicitly listed WuXi AppTec, WuXi Biologics, BGI, MGI, and Complete Genomics as "Biotechnology Companies of Concern." However, in the final enacted text, these specific names disappeared, replaced by procedural definitions for administrative designation ³.

This change directly triggered a rebound in WuXi-related stocks on December 19 (WuXi AppTec's HK shares rose over 7%, WuXi Biologics up 4.4%) ¹³. But it must be emphasized that this market sentiment is based on a misreading of U.S. constitutional principles, not the elimination of substantive risks.

Constitutional Risk Avoidance (Bill of Attainder): Article I, Section 9 of the U.S. Constitution prohibits Congress from passing a "Bill of Attainder"—legislation that punishes specific individuals without judicial trial. Had S. 1071 directly named WuXi AppTec, it would have been highly vulnerable to constitutional challenges in subsequent litigation. Thus, lawmakers adopted a more sophisticated approach: deleting names while retaining highly targeted definitional standards and delegating designation authority to administrative agencies.

3.2 The Lethal "Dual Designation Mechanism"

The final bill establishes two pathways to designate "Biotechnology Companies of Concern," effectively creating a comprehensive encirclement of China's leading CDMO firms:

DoD 1260H List Linkage: The bill explicitly states that any entity listed on the "Chinese Military Companies" list (1260H List) compiled by the U.S. Department of Defense under Section 1260H of the FY2021 NDAA automatically qualifies as a "Biotechnology Company of Concern." **BGI** and **MGI** are already on this list ⁷, meaning they are legally locked in.

OMB's Administrative Designation Power: The bill authorizes the OMB Director, in consultation with the DoD and intelligence community, to publish and update a list of companies of concern. Given that a Pentagon letter on October 7, 2025, already recommended adding WuXi AppTec to the 1260H List ¹⁶, WuXi's "supplemental listing" by OMB is almost an administrative inevitability—only a matter of time.

3.3 The Truth About Grandfathering: Is 2032 a "Buffer" or a "Stay of Execution"?

The bill includes a so-called "Grandfather Clause," allowing existing contracts to continue until January 1, 2032 ¹⁸. This clause primarily aims to prevent drug shortages in the U.S., as much of global innovative drug R&D and production currently relies on Chinese CDMO capacity.

For investors, the 2032 deadline carries dual implications:

Short-Term Cash Flow Protection: Over the next seven years, WuXi-affiliated companies can still derive revenue from existing contracts, meaning no cliff-like earnings drop.

Valuation Logic Reconstruction: The core of CDMO valuation lies in the "pipeline"—expected revenue over the next 5-10 years. Once clients (global pharma) realize they must switch suppliers post-2032, they will immediately stop signing new long-term contracts with Chinese firms. This means Chinese CDMOs will instantly transform from "high-growth stocks" to "run-off businesses," with permanently compressed P/E multiples.

3.4 Industry Reshuffle: Who Benefits?

As "de-Sinicization" becomes a hard compliance requirement, global CDMO capacity will undergo structural relocation.

Direct Beneficiaries (Alpha Opportunity): European and U.S. CDMO leaders like Lonza (Switzerland), Thermo Fisher (U.S.), and Catalent (U.S.). Additionally, Indian CDMOs (e.g., Syngene) as low-cost alternatives will absorb substantial orders diverted from China.

Losers (Risk Exposure): Beyond directly restricted Chinese firms, U.S. small biotechs overly reliant on Chinese supply chains and unable to migrate capacity by 2032 will face massive cost inflation and financing difficulties.

Chapter 4 The COINS Act: Institutionalizing Capital Controls and the End of Index Investing

The most disruptive financial provision in S. 1071 is the formal incorporation of the **Comprehensive Outbound Investment National Security Act (COINS Act)**, marking the upgrade of U.S. investment restrictions on China from "emergency executive orders" (e.g., Biden's EO 14105) to a "permanent legal framework" ⁵.

4.1 From "Single Country" to "Axis of Concern"

The COINS Act expands the definition of "Countries of Concern" from just China (including Hong Kong, Macau) to Russia, Iran, North Korea, Cuba, and Venezuela ². While China remains the primary capital destination, this expansion signals the U.S. is constructing a unified capital blockade network against a "geopolitical adversary bloc."

4.2 Plugging the "Passive Investment Loophole": ETF and Index Fund Compliance Crisis

For years, U.S. capital has flowed "passively" into Chinese defense and tech firms via index funds (e.g., MSCI China ETF, FTSE Emerging Markets ETF), dubbed the "passive index loophole" by Washington hawks ²⁰. The COINS Act targets this with surgical precision.

The bill authorizes the Treasury to prohibit or mandate notification for investments in three technology categories:

AI Systems: Especially for military, intelligence, or mass surveillance applications.

Quantum Computing: Including quantum key distribution, quantum sensing, etc.

Semiconductors & Microelectronics: Advanced node manufacturing and design.

Hypersonics (New Addition): The final text specifically adds investment bans on hypersonic systems, directly addressing China's missile tech development ¹⁹.

More critically, the bill defines "covered transactions" to include **limited partner (LP)** capital injections. This means if a U.S. pension fund (LP) invests in a VC fund that backs a Chinese AI startup, the LP may bear "knowingly" liability ⁷.

4.3 Impact on BlackRock and Vanguard

For giants like BlackRock and Vanguard, the COINS Act isn't just about compliance costs—it's a product design challenge.

Index Deviation Risk: If MSCI Emerging Markets Index includes Chinese tech stocks banned by COINS, U.S.-listed ETFs can't fully replicate the index, forcing providers to create custom "ex-China restricted tech" indices.

Outflow Pressure: As compliance risks escalate, major institutional investors may preemptively divest from broad indices with Chinese tech exposure, sustaining liquidity drain pressure on HK tech stocks (Hang Seng Tech Index constituents).

Chapter 5 New Defense Industrial Base: Replicator 2 and the Rise of "Silicon Valley Defense"

The NDAA FY2026 doesn't just "block" China—it also "unblocks" new U.S. defense capacity. The bill explicitly authorizes and funds the **"Replicator 2"** initiative, aiming to mass-deploy "attritable" autonomous weapon systems to counter China's scale advantage ²³.

5.1 From "Elite & Expensive" to "Swarm & Cheap"

Traditional defense procurement favors "elite" platforms like F-35s and aircraft carriers, dominated by legacy primes (e.g., Lockheed Martin). Replicator 2 marks a shift toward low-cost, smart, unmanned systems, opening trillion-dollar opportunities for "Silicon Valley defense tech" firms.

Core Focus: Counter-UAS (C-sUAS)

The bill emphasizes anti-drone capabilities to address growing swarm threats.

Key Beneficiaries:

Palantir (PLTR): Secured a $795M extension for its Maven Smart System contract. Beyond software, Palantir is the "OS" of new warfare, turning sensor data into strike orders ²⁵.

AeroVironment (AVAV): Maker of Switchblade loitering munitions, with an unassailable moat in small lethal drones, won new C-UAS contracts ²⁷.

Anduril Industries (Private): Though not yet IPO'd, Anduril is a Replicator winner—its Roadrunner system and Lattice OS are key to autonomous warfare. Rumored 2026/2027 IPO ²⁸.

Epirus (Private): Specializes in high-power microwave (HPM) tech; its Leonidas system is a "area denial" weapon against drone swarms ³⁰.

5.2 DJI Ban and "Blue UAS" Fortress

S. 1071 further cements the ban on China's DJI drones, prohibiting federal funds from purchasing or using DJI products in critical infrastructure—effectively creating a protected "franchise market" for U.S. drone makers.

Skydio and Shield AI, as "Blue UAS" certified firms, will monopolize government/public safety markets despite higher prices vs. Chinese rivals ³².

Chapter 6 Semiconductors & AI: Between "Total Blockade" and "Market Preservation"

6.1 GAIN AI's Absence: Nvidia's Breathing Room

The final bill dropped the GAIN AI clause requiring U.S. chipmakers to prioritize domestic orders—a major win for Nvidia (NVDA) and AMD. This shows the U.S. wants to restrict China's compute access without severing its firms' overseas revenue or micromanaging order allocation ⁹.

Investment Takeaway: Short-term, Nvidia can keep shipping to non-restricted nations (even some Chinese clients via carveouts), easing revenue pressure. Long-term, export control red lines on advanced chips will only tighten.

6.2 DeepSeek and HighFlyer AI Bans

Section 1532 explicitly bars DoD from procuring/using systems from DeepSeek and HighFlyer AI ³⁴. Unlike biotech's ambiguity, software bans are direct.

Sovereign AI Logic: This reinforces "sovereign AI" investing—U.S. government data must run on U.S./ally-built models. This benefits not just model providers (OpenAI, Anthropic) but also compliant cloud infra (Microsoft Azure Government, AWS GovCloud).

Chapter 7 Geopolitical Counterstrikes: Beijing's "Resource War" and Supply Chain Fracture Risks

Facing NDAA's pressure, China's countermeasures have shifted from "verbal protests" to substantive "resource control" and "sanctions lists."

7.1 Critical Minerals: Gallium, Germanium, and Antimony

Despite briefly "pausing" gallium/germanium export controls in late 2024, Beijing may reimpose or cut off these materials post-NDAA ³⁵.

Strategic Vulnerability: Gallium is essential for AESA radars and 5G base stations—China controls ~98% of global primary supply. Germanium is key for IR optics (night vision). Replicator's drones/missiles need these China-monopolized inputs.

Price & Substitution: Export curbs would spike non-Chinese gallium/germanium prices, benefiting miners like Eurasian Resources Group (Kazakhstan) or MP Materials (U.S.). But development timelines mean U.S. defense supply chains face acute shortage risks.

7.2 Weaponizing the "Unreliable Entity List"

China's Commerce Ministry is increasingly using the "Unreliable Entity List" (UEL) to sanction U.S. firms. Recently, U.S. drone maker Skydio was listed for Taiwan arms sales, instantly severing its battery supply chain ³².

Due Diligence Imperative: This warns investors—evaluating "defense tech" stocks requires scrutinizing supply chains (BOM). A U.S. drone firm with Pentagon contracts but Dongguan batteries is a "sudden death" risk. True alpha lies in fully "de-Sinicized" supply chains.

Chapter 8 Investment Strategies and Deep Recommendations

8.1 HK Investors' Playbook

Beware "List Risk": WuXi's rebound is an exit opportunity, not an entry. The OMB/DoD designation sword looms; the 2032 deadline caps valuations. Avoid any 1260H-list candidates.

Embrace "Internal Circulation": Shift to firms purely serving China's domestic demand with no U.S. supply/revenue exposure—e.g., high-dividend SOEs (telcos, energy, banks).

Avoid "Hard Tech": Under COINS, HK semiconductors/AI/quantum stocks face persistent foreign outflow discounts.

8.2 U.S. Investors' Playbook

Overweight "Defense OS": Palantir (PLTR) is central to new defense logic, with deep software moats. Also watch AeroVironment (AVAV)'s hardware monopoly.

Long "Supply Chain Reshoring": Buy Lonza (LONN) and Thermo Fisher (TMO)—top biopharma de-Sinicization beneficiaries.

Track "Friend-Shored" Minerals: Gallium/germanium/rare earth projects in Australia/Canada/U.S. command strategic scarcity premiums.

ETF Scrubbing: Audit EM ETF holdings to exclude COINS-banned names, avoiding passive compliance risks.

8.3 Conclusion: Bifurcation Risk Premium

S. 1071 isn't just a law—it's a milestone in the global economic order's shift from "efficiency-first" to "security-first." For 30 years, capital sought the lowest-cost production; for the next decade, it must seek the safest.

For investors, this means valuation recalibration: Assets with secure, independent supply chains (U.S. defense, non-China biomanufacturing) will enjoy "security premium" multiple expansion; those reliant on U.S.-China arbitrage face permanent "bifurcation discount."

Disclaimer: This report is for informational purposes only and does not constitute financial advice. All investments involve risks, including loss of principal. Market conditions and legal interpretations may change over time—investors should exercise independent judgment.