A major divide is emerging in America’s policy toward China. On the one hand, there are American consumers and defense hawks worried about the rise of China. On the flip side, Wall Street investors and pundits are urging to expand trade with Beijing. That tension has now come to a head as Congress considers legislation to help US technology companies better compete with China. But even as members of Congress weigh proposals to reshape US-China policy, they must recognize one overriding concern – the need to remove poorly functioning Chinese companies from US financial markets.
For decades, Chinese companies have been able to raise trillions of dollars in capital by selling securities through the New York Stock Exchange and other markets. Currently, thousands of Chinese companies and their affiliates are still raising money in the US capital markets. In fact, the US-China Economic and Security Review Committee (USCC) has identified 261 Chinese companies — including eight state-owned companies — listed on America’s three largest stock exchanges, with a combined market capitalization of $1.4 trillion.
The risk of diverting US money to Chinese companies has already grown in recent years. In 2018, the Securities and Exchange Commission and the Public Company Accountability Oversight Board warned investors that US regulators face challenges when conducting oversight of companies with headquarters in China and Hong Kong. Since that time, China has constantly withheld documents required by PCAOB. Many of these Chinese companies are complicit in Beijing’s military objectives, industrial expansion, and human rights abuses.
In February, the House of Representatives passed the American Competition Act — legislation aimed at boosting American competition with China. This legislation is now vying for consideration with another Chinese bill – USICA – passed by the Senate last summer.
The House and Senate are currently trying to incorporate their bills into the final China package. And this is where the American people should pay attention because Congress is discussing a provision requiring annual reports on Chinese companies located in American capital markets.
House and Senate bills originally contained language to identify companies that could undermine US national security, violate international human rights standards or pose risks to US-based investors. For the American people, such a requirement appears to be a no-brainer. Unfortunately, Congress is now considering this requirement in final China legislation.
The original provisions of the House and Senate may have differed slightly, but Congress should require annual oversight of the US financial markets. To achieve this, the State Department must take the lead. That’s because the State Department is the interagency chief for human rights and foreign affairs—and is well-equipped to address the nuances of international politics and human rights issues. The Treasury Department certainly has a role. But such reports need to be as robust as possible – in order to understand the threats lurking in US capital markets. This includes Chinese index funds, ETFs, and hedge funds — not just the well-known companies listed on the New York Stock Exchange.
To protect US investors, these reporting requirements must be comprehensive and complete. A combination of both the original language of the House of Representatives and the Senate would be most effective. The language of the Senate’s “Section 3407″—which stems from the Strategic Competition Act—will include the leadership of the State Department. The language in Section 30133 of the House of Representatives would require a comprehensive and robust report on the actual presence of China’s financial operations in US capital markets.
As recent polls show, Americans overwhelmingly prefer to use economic tools to counter predatory China trade. They do not want Chinese companies to raise money in US financial markets to advance Beijing’s global ambitions.
As Congress considers competing China proposals, lawmakers should insist on comprehensive reporting on Chinese entities in US capital markets. Members of Congress should combine Senate Language 3407 with House Section 30133 to create the best protection for American investors. Otherwise, Congress may fail to address major strategic concerns — and inadvertently allow US investors to fund the Chinese Communist Party’s ambitions.
The decision must be clear – transparency and accountability serve the interests of the United States, not those of Beijing and Wall Street.
• Robbie Stephanie Smith, National Security Adviser to the Coalition for a Prosperous America.