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White House urged to limit US investment in Chinese stocks and bonds

House panel chair says forthcoming rules on China must curb flows to public markets

By Demetri Sevastopulo in Washington, Kana Inagaki in Tokyo and Henry Foy in Brussels

August 4, 2023

A forthcoming executive order on US investment into China should also cover capital flows into public markets, says Mike Gallagher, the head of the House China committee © EPA-EFE

The head of a US congressional committee has urged President Joe Biden to widen forthcoming limits on investments in China to cover stocks and bonds, saying anything less would “fail to address the bulk of the security threat” posed by Beijing.

Mike Gallagher, chair of the House China committee, told the president that a new executive order expected soon from the White House must cover US participation in Chinese public markets, not just direct investments from private equity and venture capital groups.

“Public market investments represent the majority of US capital flows to the People’s Republic of China. Any rules that exempt them will fail to address the bulk of the national security threat,” the Wisconsin Republican wrote in an August 3 letter to Biden seen by the Financial Times.

Gallagher wrote in the letter that a “sizeable” part of the estimated $1.3bn in US investment in China finances “the Communist party’s abhorrent human rights abuses” and groups with connections to the People’s Liberation Army.

The order, expected from Biden next week, will follow efforts to restrict Chinese access to US technology in areas such as semiconductors, artificial intelligence, and quantum computing. It is designed to restrict the flow of US capital to groups connected to China’s military.

On Tuesday, the House China committee accused BlackRock, the world’s largest asset manager, and MSCI, a compiler of stock market indices, of “unconscionable” profiting from investments that help the Chinese military.

US officials have suggested the new order will require companies to notify the government about investments in the sensitive sectors, and be banned in some cases. Critics have worried that the order will be weaker than some in the administration sought, partly because of lobbying from US companies and some allies.

“If American capital continues to flow to Chinese military companies, we are at risk of funding our own destruction,” Gallagher told the FT. “Wall Street needs to recognise that investing in critical technology sectors in the PRC endangers our military service members, imperils the targets of the Chinese Communist party’s human rights abuses, and enhances systemic risks for the global economy.

That’s a deadly cocktail the American people didn’t order and don’t want to be served.” Gallagher said the order should give investors predictability by not creating an “unnecessarily burdensome” case-by-case screening process.

The administration should persuade allies “to follow suit with their own parallel restrictions”, he said. The administration’s efforts to build a consensus with international partners have been complicated by the countries’ different legal systems and some allies’ reluctance to go as far as more hawkish US figures had wanted.

Japanese officials said they had no plan to create a similar screening instrument because it would have loopholes as long as companies could channel investments through countries such as the Cayman Islands.

At an EU summit in June, leaders including Germany’s Olaf Scholz did not raise serious concerns about the US moves, suggesting they were satisfied the measures had been sufficiently tempered by months of discussions between the US and G7 partners to find a compromise acceptable to less-hawkish countries such as Germany and France.

“Of course we have differing views . . . we are ready to have a stable and constructive relationship with China,” said one senior EU diplomat. “But the US sees the added value of us being together rather than divided.”

The new executive order will come as the Biden administration tries to update export controls unveiled last October. Big companies including Intel and Qualcomm have voiced concern about the efforts to senior officials.

The delay has caused consternation among some allies. Japanese government officials have expressed frustration that the US has still not updated the controls despite earlier putting pressure on Japan and the Netherlands to align their measures with Washington.

Noting that the US outbound investment screening could be “watered down” from earlier tougher drafts, one of the Japanese officials said: “It’s almost as if they’re suddenly afraid of upsetting China.”


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