Over the last week, Committees from the House and Senate marked up some of their final edits to three bills targeting China. While much of it was a diplomatic appeal to working with allies and the United Nations, the one bipartisan Senate bill proposed by Sen. Bob Menendez (D-NJ) and James Elroy Risch (R-ID) might give Wall Street night sweats.
Here’s a look at what’s inside and what CPA has found worthy of highlighting.
In the House: Onus Put on United Nations
The House Foreign Affairs Committee passed out two bills geared towards making it harder to import goods from Xinjiang derived from forced labor. Bills H.R. 1155 and H.Res. 317 are similar in targeting imported goods from the Western China province where Disney filmed live-action Mulan, and where tens of thousands of Uyghur Muslims are held in what the CCP calls re-education camps as part of its own war on terrorism.
The House Resolution 317, by Republican Representative Michael McCaul of Texas, calls upon the President to direct the United States Permanent Representative to the United Nations to use the voice, vote, and influence of the United States to “refer the People’s Republic of China’s genocide and crimes against humanity against Uyghurs and members of other ethnic and religious minority groups to the competent organs of the United Nations for investigation.”
This puts the onus on the UN to act, though we doubt that they will use the term “genocide” and “China” in the same sentence. CPA sees this as a “heavy lift” in the Security Council where China has a veto, but the resolution is spot-on: the U.S. needs its allies and major multilateral bodies like the UN to call out the CCP on this one. It will be a tell-tale sign if they do not, further eroding the confidence in these global institutions to tackle anything remotely critical of “the China way”.
This is a pre-2016, multilateralist approach to dealing with China and CPA sees it as an imminent failure.
As for H.R. 1155, by Democratic Representative James McGovern of Massachusetts, the bill notes that the U.S. Customs and Border Protection (CBP) has issued 11 “Withhold Release Orders” on products suspected to be produced with prison or forced labor in Xinjiang. Products subject to the “Withhold Release Orders” include all cotton, cotton products, tomatoes, and tomato products as well as certain garments, hair products, apparel, computer parts, and other products.
It is worth noting that the region is also a hub for polysilicon used for solar cell manufacturing, and is the corporate headquarters of Goldwind, one of the largest wind turbine makers in the world. This bill would put any company in Xinjiang on notice, though it is unclear if some sort of “guilty until proven innocent” action will be taken on more companies.
CPA suspects there will be more WROs in Xinjiang, putting those companies and their supply chain on shaky ground.
According to a 2019 Annual Report, the Congressional-Executive Commission on China products reportedly produced with forced labor by current and former mass internment camp detainees included textiles, electronics, food products, shoes, tea, and handicrafts.
In the Senate: From Olympic Boycott to NYSE Bans
The bipartisan Strategic Competition Act (SCA) is primarily focused on foreign policy matters. Like the house bills, it highlights human rights abuses and, in being more of a big picture legislation than the House bills, expresses the need to work with allies in Europe, India and Southeast Asia.
The Indo-Pacific region is of particular concern as China multinationals and their corporate brand awareness increases (think Lenovo, TikTok, AliPay, Zoomlion, and many more). There is also concern that technical standards could eventually favor China tech over U.S. technology. There is a sense among the bill’s authors that Latin American countries risk moving closer to a China top-down economic model post-pandemic, including an embrace of surveillance and censorship.
Under Title 1, Subtitle A – Science and Technology – the bill states that the SCA authorizes “to assist United States companies with global supply chain diversification and management” and they will appropriate $15 million to consultants working with the Department of Commerce to “assist interested U.S. persons and businesses with supply chain management issues related to China, including exiting from China.” Small to mid-sized businesses were to be given the priority.
Under Title III, Investing in Our Values, the bill’s authors called for a “diplomatic boycott of the XXIV Olympic Winter Games and the XIII Paralympic Winter Games.”
The main part of the bill that will hurt China if it is ever implemented is under Title IV, Investing in our Economic Statecraft, Section 407. Here, Menendez and Risch go for the jugular, at least in writing.
If passed, it would require the State Department – in consultation with the Office of the Director of National Intelligence and Treasury – to produce an independent report on “the risks posed to the U.S. by the presence in U.S. capital markets of companies incorporated in China.”
Of interest was the fact that this also includes the A-shares, stocks listed in Shanghai and Shenzhen, and those that are incorporated in exchange-traded funds sold to American investors. This could be a problem for big investment firms and hedge funds that buy China shares directly in Shanghai and Shenzhen and either repackage them into ETFs, or just hold them in accounts in China.
SCA basically calls for a report to examine whether China companies have “knowingly and materially” contributed to activities that undermine U.S. national security, are involved in human rights abuses, have been engaged in corporate espionage and IP theft or “contributed to the development of technologies that enable censorship directed or directly supported by the China government.”
That one is a potential pandora’s box as it would describe every China social media platform, including TikTok which is privately owned by ByteDance and not yet public; Tencent’s WeChat, and Sina’s Weibo. Sina is listed on the Nasdaq.
Lastly, although not named directly, it asks for a list of companies that have failed to comply with third-party financial audits. China has been non-compliant for years and now Congress is making noise about it.
We hope this leads to action rather than just bills that either never get passed, or when they do, lead to years of investigation that go nowhere. If the SCA is passed, State Department would have 180 days of the Act’s approval by Biden to report on their findings.
In the meantime, despite this being a known threat for the past year in China, their companies are ignoring it, either because they are fine with being compliant with Sarbanes-Oxley Act audits, or are thumbing their nose at Congress. As CNBC put it this week, a “tidal wave” of fresh new China companies will do an IPO here this year; 60 of them, in fact.
Summarized below from the SCA21:
“After normalizing diplomatic relations with China in 1979, the U.S. actively worked to advance China’s (PRC) economic and social development to ensure that the PRC participated in and benefitted from the free and open international order. The U.S. pursued these goals and contributed to the welfare of the Chinese people by increasing China trade relations and access to global capital markets; promoting China’s ascension to the WTO; providing development and project finance loans; R&D collaboration; being an education hub for China’s best students; tech transfers and some military assistance. It is now clear that China has chosen to pursue state led mercantilist economic policies and increasingly authoritarian governance model at home through increased restrictions on personal freedoms, and an aggressive and assertive foreign policy. These policies frequently and deliberately undermine U.S. interests and are contrary to core U.S. values and the values of other nations, both in the Indo-Pacific and beyond.”