Congress Considering Five New Bills Targeting China Stocks & Bonds

China Flag on Wall Street

The House and Senate are currently considering several newly-introduced bills that will make it harder for Wall Street to invest in Chinese securities. These bills have the potential of dealing a debilitating blow to Wall Street’s underwriting of CCP-controlled companies, many with ties to the People’s Liberation Army and human rights abuses, and which are already sanctioned by the United States. 

For newcomers to this topic, U.S. asset managers are already restricted from owning dozens of stocks and bonds issued by Chinese defense contractors. That list of off-limits companies was first written up by the Trump administration, then changed and expanded somewhat under Biden. But many legislators and others who have testified in House and Senate hearings on China have argued that American investment capital is still going into companies that are banned from exporting to the United States, face restrictions by the Defense Department, or are either part of an Entity List, or a subsidiary of an Entity List company, as CPA highlighted numerous times last summer. These people argue that, at a minimum, companies with restricted or banned access to U.S. technology should not be open to investors.

Members of both parties are behind these five bills. If passed, they have the potential to greatly reduce the long standing trend of American capital underwriting China’s state-run companies and its economy.

On the Republican side, Republican Study Committee (RSC) Chairman Kevin Hern (OK-01) and RSC National Security Task Force Chairman Joe Wilson (SC-02) introduced the Countering Communist China Act (H.R. 7476) in February. The bill has 47 co-sponsors and is being reviewed by numerous House Committees.

In that bill is a section titled Stop Funding the CCP through A-Shares Act. This provision would eliminate American investment in securities listed on the Shanghai and Shenzhen stock exchanges if included in final legislation and signed into law. 

A record $253 billion of foreign capital, much of it American, was invested in mainland China stocks in 2019. These “A-shares” have been witnessing a sell-off since the pandemic, where attitudes towards China have deteriorated. Last year, over 75% of foreign capital in China sold out of the market, forcing new Chinese funds to pick up the slack. China A-shares are down around 22% in the last five years and down 48% from their February 2021 highs, leading some to argue that investing in mainland China securities given the combination of political risks and a data black hole is a breach of fiduciary duty by money managers.  Investment risks aside, these exchanges are replete with companies deeply involved in the Chinese military industrial complex and human rights abuses.

If that section of the bill seems too radical, the Protecting American Retirement Savings section of H.R. 7476 should be considered common sense. It bans any retirement plan governed by the Employee Retirement and Security Act from holding securities of any sanctioned or Entity List corporation.

Rep. Brad Sherman (D-CA-32) is taking a slightly different tack on the A-shares market. The No China in Index Funds Act (H.R. 7758) was introduced in March and takes mainland China stocks, and offshore listings such as Variable Interest Entities, out of the indexes. If it passes, some indexes – like the MSCI China A-Shares – would simply fold. Rep. Victoria Spartz (R-IN-5) is a co-sponsor.

March was a China securities bills heyday for both Sherman and Spartz. They introduced three other bills: the China Military and Human Rights Capital Markets Sanctions Act (H.R. 7759) bans Americans from investing in sanctioned Chinese companies and their subsidiaries. The China Risk Reporting Act (H.R. 7757) would require American companies listed on the NYSE and Nasdaq to include in their annual reports a description of their “China Risk”, defined as the company’s exposure to material financial consequences potentially caused by the Chinese Communist Party. Lastly, the No Capital Gains Allowance for American Adversaries Act (H.R. 7760), would make China investments less attractive by taxing gains as ordinary income rather than the long-term capital gains rates that range from 0% to 20% depending on income and tax filing status.

In making the case for their bills, Representatives Spartz and Sherman used CPA’s case study report to Congress, published in October, which showed how Vanguard and the FTSE Index are helping to funnel billions of dollars of U.S. investor capital to China. For instance, a well-known mutual fund company for retired military, USAA, has investments in companies on the Uyghur Forced Labor list.

This year’s latest China capital markets legislation follows a string of bills last year with similar goals. Many of them were initiated by Sen. Rick Scott (R-FL) – he introduced five bills himself in March and in November co-sponsored with Sen. Bob Casey (D-PA) the Disclosing Investments in Foreign Adversaries Act (S. 3286). This bill has been included in the Countering Communist China Act. The Scott-Casey bill would require private advisors to private equity funds to report to the SEC the total private fund assets the advisor recommends that are invested in China.

It is unclear when, or if, any of these bills will be moved out of committee. The most likely initial moves will be capital market restrictions against owning the securities of Chinese companies on Entity Lists or facing sanctions of another kind by the Treasury Department.

The U.S. invests more in China stocks than China invests in American stocks, but that is mostly due to capital controls in Beijing. They do not allow for outbound investment the way we do. The new legislation is designed to greatly reduce those one-sided flows of U.S. capital that are effectively funding our principal adversary.  

On Friday, CPA CEO Michael Stumo told Fox Business, “China is an adversary to the U.S. We can and should strategically decouple from it and increasingly stop funding it,” Stumo told FOX Business.


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