Committee Chairman Patrick McHenry (R-NC-10) kept with his previous take on the topic and warned against getting in the way of New York private equity players like KKR, and Silicon Valley giants that fund the new tech companies driving much of the economies of the U.S. and China today. He supports more private investment in China, something CPA’s vice chairman Dan DiMicco called “dangerously foolish” in a Dec. 4 op-ed in The Charlotte Observer, McHenry’s home base newspaper.
“It is important we don’t kneecap our most important asset: our capital markets,” McHenry said. “We have to get the mechanics right on outbound capital market restrictions so that regulators can implement these programs and the private sector can abide by them and understand them.”
His remarks made it sound like he could be persuaded. Maxine Waters echoed some of McHenry’s points, expressing concern about U.S. investment restrictions into China.
“I don’t want to cripple American investments, either,” she said. “These rules should be based on facts (about the investment in question) and we should have good information about what kind of investments we will be restricted.”
Emily Kilcrease, Senior Fellow at the Center for a New American Security [Testimony] said that no matter the approach, getting outbound investment curbs would not be easy.
“For sure investors are part of the problem,” she said. “The trick is not hurting open markets, while shedding a light on the dark pools of money that are being invested into high risk transactions.”
Waters – who does not count finance as a top donor, unlike Chairman McHenry who does – said the Committee should talk to venture capital and private equity firms to “see what kind of cooperation we can get”.
Three bills were tossed around as solutions to legislating an outbound investments restrictions regime. One was by Committee member Andy Barr (R-KY-6), H.R. 760, which bans all financial and commercial trade with companies on any government Entity List.
Thomas Freddo, founder of Rubicon Advisors, a firm that advises companies on how to navigate national security laws, seemed to like Barr’s bill best because it immediately identifies companies that will be off-limits to both investment firms and tech companies. [Testimony]
In a letter to the leaders of the House Financial Services Subcommittee on National Security, Illicit Finance, & International Financial Institutions, the American Securities Association (ASA) advocated in favor of entity list names being restricted from capital markets, or restricting access to entire sectors. “Congress must use every tool at its disposal to combat the danger posed by an adversary that refuses to play by the rules…and is determined to continue funding its challenge to this order with Western capital. The threat posed to American investors and the integrity of our capital markets demands action not delay,” the letter said. Going further, the ASA said that Congress should prohibit any U.S. entity – from retail investors to Wall Street, pension funds to endowments – from investing in the mainland China equity market (known as the A-shares market), because it was “rife with fraud and is the nexus of the military-civil fusion controlled by the CCP.”
For Freddo, a sector by sector approach, like in H.R. 6349 by Rep. Michael McCaul (R-TX-10) is made more complicated because the technologies in question are upgraded too fast, and always changing.
Kilcrease said that existing export controls do not target U.S. investment firms putting money to work in those very companies that face restrictions, for the most part. And Freddo said he was not sure if the restrictions are really working.
For the different bills on the table to enforce new outbound restrictions, Kilcrease said that the three bills, which includes one in the Senate, may be best merged together.
“There are synergies between the bills on the table. Overall, you have to make sure you are not setting up an intensive screening process and that you are not creating rules that the private sector cannot deal with,” she said, adding that waiting for companies to be added to the Entity Lists at the Defense Department, Commerce and State can take too long. Not to mention the fact that companies can change names and addresses, or outsource work to partnering companies throughout Asia, let alone at home in mainland China.
This is looking like a whack-a-mole carnival game that might not end with a big teddy bear prize when the game’s over.
Rep. Vicente Gonzalez (D-TX-34) gave an example of the challenges they face.
“My constituents are now seeing China money flowing into Mexico so goods can be shipped into the U.S. duty free. For outbound capital market restrictions, I wonder if we only consider direct investment into China tech companies for these restrictions? If we do that, then we will just see that money get redirected into other countries, like Mexico. What’s stopping them from building a chips maker in Mexico to circumvent export restrictions?” he asked.
Kilcrease said that most of the funnels used to avoid restrictions lead throughout Asia, “but we have to work with Mexico now because we have a free trade agreement with them.” Kilcrease suggested that the onus is ultimately with Mexico, a country that is unlikely to police China investment into the country without serious pressure from Washington to reject it.
For this reason, Kilcrease said that existing export restrictions and the proposed outbound investment rules, something Capitol Hill law firms refer to as a “reverse CFIUS”, will “not fix all of these problems. If you shut down one bilateral flow, it will go somewhere else. That is what we always see.”
Read the May 17, 2023 letter to President Biden on “reverse CFIUS” signed by CPA CEO Michael Stumo and others.
Working with allies like Mexico will not happen on Washington’s schedule.
The European Union released a White Paper about how it thinks about a reverse CFIUS of their own. The immediate action is a two year examination of investments in China. Only after that review is complete will some action be taken…or not, Freddo told the Committee.
In Tuesday’s hearing, Rep. Brad Sherman (D-CA-32) once again talked about how U.S. companies often inadvertently help China technology advance on par with our own. He called for a reciprocal trade agenda with China, advocating for tariffs.
Maxine Waters Wants “Screening” of Silicon Valley Investments in China
California Congresswoman and Ranking Member of the House Financial Services Committee, Maxine Waters (D-CA-43), said in a hearing on Tuesday that she is all for “expanded screening” of Silicon Valley portfolio holdings in China.
“We need to extend the screening to existing investments, too,” she said, rather than just go after new investments made by American venture capital firms into Chinese startups. Waters included here “the billions of opaque dollars in private equity” as well, adding that Congress has an “an opportunity to assure none of American financial resources are being used to undermine our security.”
Tuesday’s hearing, titled “Better Investment Barriers: Strengthening CCP Sanctions”, marks the third hearing in Congress this week that focuses on China. The House Select Committee on the CCP held one yesterday and the U.S. China Economic and Security Review Commission is having an all-day session today. They all have one thing in common – Washington’s newfound framing of the China story as a national security matter instead of an economic security one, or even a trade issue that can harken back to the Biden administration’s old campaign slogan of “Build Back Better.”
When asked by Rep. Dan Meuser (R-PA-9) if companies and investors like those Rep. Waters mentioned in her opening remarks were leaving China, one of the three witnesses – Richard Ashooh from Lam Research – said they were. [Ashooh’s testimony]
Committee Chairman Patrick McHenry (R-NC-10) kept with his previous take on the topic and warned against getting in the way of New York private equity players like KKR, and Silicon Valley giants that fund the new tech companies driving much of the economies of the U.S. and China today. He supports more private investment in China, something CPA’s vice chairman Dan DiMicco called “dangerously foolish” in a Dec. 4 op-ed in The Charlotte Observer, McHenry’s home base newspaper.
“It is important we don’t kneecap our most important asset: our capital markets,” McHenry said. “We have to get the mechanics right on outbound capital market restrictions so that regulators can implement these programs and the private sector can abide by them and understand them.”
His remarks made it sound like he could be persuaded. Maxine Waters echoed some of McHenry’s points, expressing concern about U.S. investment restrictions into China.
“I don’t want to cripple American investments, either,” she said. “These rules should be based on facts (about the investment in question) and we should have good information about what kind of investments we will be restricted.”
Emily Kilcrease, Senior Fellow at the Center for a New American Security [Testimony] said that no matter the approach, getting outbound investment curbs would not be easy.
“For sure investors are part of the problem,” she said. “The trick is not hurting open markets, while shedding a light on the dark pools of money that are being invested into high risk transactions.”
Waters – who does not count finance as a top donor, unlike Chairman McHenry who does – said the Committee should talk to venture capital and private equity firms to “see what kind of cooperation we can get”.
Three bills were tossed around as solutions to legislating an outbound investments restrictions regime. One was by Committee member Andy Barr (R-KY-6), H.R. 760, which bans all financial and commercial trade with companies on any government Entity List.
Thomas Freddo, founder of Rubicon Advisors, a firm that advises companies on how to navigate national security laws, seemed to like Barr’s bill best because it immediately identifies companies that will be off-limits to both investment firms and tech companies. [Testimony]
In a letter to the leaders of the House Financial Services Subcommittee on National Security, Illicit Finance, & International Financial Institutions, the American Securities Association (ASA) advocated in favor of entity list names being restricted from capital markets, or restricting access to entire sectors. “Congress must use every tool at its disposal to combat the danger posed by an adversary that refuses to play by the rules…and is determined to continue funding its challenge to this order with Western capital. The threat posed to American investors and the integrity of our capital markets demands action not delay,” the letter said. Going further, the ASA said that Congress should prohibit any U.S. entity – from retail investors to Wall Street, pension funds to endowments – from investing in the mainland China equity market (known as the A-shares market), because it was “rife with fraud and is the nexus of the military-civil fusion controlled by the CCP.”
For Freddo, a sector by sector approach, like in H.R. 6349 by Rep. Michael McCaul (R-TX-10) is made more complicated because the technologies in question are upgraded too fast, and always changing.
Kilcrease said that existing export controls do not target U.S. investment firms putting money to work in those very companies that face restrictions, for the most part. And Freddo said he was not sure if the restrictions are really working.
For the different bills on the table to enforce new outbound restrictions, Kilcrease said that the three bills, which includes one in the Senate, may be best merged together.
“There are synergies between the bills on the table. Overall, you have to make sure you are not setting up an intensive screening process and that you are not creating rules that the private sector cannot deal with,” she said, adding that waiting for companies to be added to the Entity Lists at the Defense Department, Commerce and State can take too long. Not to mention the fact that companies can change names and addresses, or outsource work to partnering companies throughout Asia, let alone at home in mainland China.
This is looking like a whack-a-mole carnival game that might not end with a big teddy bear prize when the game’s over.
Rep. Vicente Gonzalez (D-TX-34) gave an example of the challenges they face.
“My constituents are now seeing China money flowing into Mexico so goods can be shipped into the U.S. duty free. For outbound capital market restrictions, I wonder if we only consider direct investment into China tech companies for these restrictions? If we do that, then we will just see that money get redirected into other countries, like Mexico. What’s stopping them from building a chips maker in Mexico to circumvent export restrictions?” he asked.
Kilcrease said that most of the funnels used to avoid restrictions lead throughout Asia, “but we have to work with Mexico now because we have a free trade agreement with them.” Kilcrease suggested that the onus is ultimately with Mexico, a country that is unlikely to police China investment into the country without serious pressure from Washington to reject it.
For this reason, Kilcrease said that existing export restrictions and the proposed outbound investment rules, something Capitol Hill law firms refer to as a “reverse CFIUS”, will “not fix all of these problems. If you shut down one bilateral flow, it will go somewhere else. That is what we always see.”
Read the May 17, 2023 letter to President Biden on “reverse CFIUS” signed by CPA CEO Michael Stumo and others.
Working with allies like Mexico will not happen on Washington’s schedule.
The European Union released a White Paper about how it thinks about a reverse CFIUS of their own. The immediate action is a two year examination of investments in China. Only after that review is complete will some action be taken…or not, Freddo told the Committee.
In Tuesday’s hearing, Rep. Brad Sherman (D-CA-32) once again talked about how U.S. companies often inadvertently help China technology advance on par with our own. He called for a reciprocal trade agenda with China, advocating for tariffs.
“We can’t starve China of investment capital, but we don’t need to incentivize it,” he said. Sherman has tried to convince legislators that investment funds focused on China should be treated differently for capital gains taxes.
“They buy our bonds, and we buy their stocks,” Sherman said, adding that unlike Treasury bond holdings, U.S. investors are actively helping Chinese companies grow and get rich. For some on Capitol Hill, like Sherman, this is unwise, especially in companies that are on the verge of wiping out their American rivals.
“We have tariffs on China and they tariffs on us, only our goods going there face a higher tariff than China goods coming here. Plus, they can orally instruct their companies not to buy our goods,” Sherman said, repeating similar remarks at a Financial Services hearing late last year.
Tesla faces security restrictions in China that could impact sales in what appears to be a tit-for-tat move by Beijing. The U.S. banned TikTok on government phones in Dec. 2022, so Beijing banned iPhones for government employees in Sept. 2023. Big Tech companies like Facebook and Google have long been banned or restricted from gaining a foothold in mainland China.
“This is why we need much higher tariffs on China,” Sherman said.
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