The US Treasury department is attempting to water down an executive order from President Donald Trump that bars Americans from investing in Chinese companies with suspected ties to the People’s Liberation Army.The effort has been met with furious opposition from the Pentagon and state department, opening up a heated dispute over one of the last big anti-Beijing policies of the Trump era.

Mr Trump last month issued an order barring US investors from investing in Chinese companies that the Pentagon put on a list of groups suspected of helping the Chinese People’s Liberation Army.

The effort is part of a broad push to counter China’s “military-civil fusion” strategy which compels Chinese companies to share technology with the PLA. The Trump administration argues that the strategy means US investors who invest in Chinese companies are helping Beijing and damaging America’s national security.

MSCI, an index provider, this week removed the Chinese companies from its indices in response to the order, following a similar move by rivals including FTSE Russell.

But many investors have been waiting for guidance from Treasury’s Office of Foreign Assets Control to determine if they need to sell shares in the 35 Chinese companies on the Pentagon list, and their subsidiaries.

Three people familiar with the debate said Treasury wanted to exclude Chinese subsidiaries from the ban, but that the effort is being fiercely resisted by the state department and Pentagon, which have argued that not including them would significantly weaken the overall impact of Mr Trump’s order.

The NSC and Treasury declined to comment. The Pentagon did not respond to a request for comment.

The state department also did not comment. But last week it raised concerns about the number of subsidiaries of the blacklisted companies that are included in stock and bond indices. It said the subsidiaries of 24 of the 35 Chinese companies on the Pentagon list were included in a major securities index.

In a statement accompanying a fact sheet on the issue, Mike Pompeo, secretary of state, raised concern about the “military-civil fusion” programme. The document said money flowing into index funds “supports Chinese companies involved in both civilian and military production” that were also involved in repressing human rights.

The state department also cited a letter from Robert O’Brien, national security adviser, in May which said some Chinese companies in the MSCI indices presented “significant national security and humanitarian concerns for the United States” that exposed them to possible US sanctions.

One of the people familiar with the situation said the debate was the last big fight over China inside the Trump administration before the president leaves office on January 20 and is replaced by Joe Biden.

The Pentagon list includes large companies, such as Aviation Industry Corporation of China. But according to the state department, there were at least eight Avic subsidiaries still included in major indices from MSCI and FTSE at the beginning of December. A number of subsidiaries of China Railway Construction Company are also included in the indices from the two providers.

Roger Robinson, a former NSC official who believes the US should take a tougher stance on allowing Chinese companies in its capital markets, said Treasury was trying to dilute the impact of the executive order.

“Treasury is reportedly insisting on narrowing, diluting and otherwise defanging key provisions of the order,” said Mr Robinson, who runs RWR Advisory Group, a risk consultancy. “It appears to demonstrate more interest in protecting Wall Street’s fees and Beijing’s interests than scores of millions of unwitting American retail investors and our national security.”

China hawks frequently accuse Steven Mnuchin, Treasury secretary, of being weak on China due to his efforts to resist some of the more hardline measures proposed during the four years of the Trump administration.

His defenders privately say that Mr Mnuchin is adopting a balanced approach that takes into account the effect on the US economy. Some have also pointed out that there are legal issues that are sometimes more complicated than the hawks will admit.

After three years of resisting lobbying by his more hawkish officials, Mr Trump recently gave the green light for a string of assertive measures against China as he blamed Beijing for the global spread of Covid-19.

The Financial Times reported earlier this year that the White House had told the Pentagon to publish a list of Chinese companies with alleged ties to the military, which was required under a two-decades old law that was not being complied with.

Congress last week passed a defence spending bill that would require the Pentagon to produce a comprehensive list every year, but Mr Trump has threatened to veto the bill over unreleased measures.

Follow Demetri Sevastopulo on Twitter