Is the U.S. Arming an Adversary, China, Intent on Overpowering Us?

China’s greatest financial weakness remains its continued dependence on Western capital markets, crucial for a growing economy…. To grow, China depends on massive inflows of capital that surge through the capital markets based in the U.S. The Trump administration made several moves during its term to delist Chinese companies that are not forthcoming about who really owns them and what businesses they are really engaged in.

[S]ince 2013, Chinese state-owned enterprises have enjoyed exemptions from Sarbanes-Oxley and other regulatory requirements that also force greater transparency from these companies. They were the only ones granted these exemptions while still being listed on New York stock markets. What if those exemptions were removed?

The only relevant screening in the US happens through the same government body that approved the sale of Uranium One to Russian government-backed investors, called the Committee on Foreign Investment in the United States.

Yet, U.S. capital markets currently have no such insulation. So we have capital markets which freely trade the shares of companies that have violated international sanctions, sold America’s adversaries advanced ballistic missiles, armed the PLA, and helped militarize the fabricated new islands in the South China Sea. These companies freely receive investment dollars from ordinary Americans saving for their retirement, unaware of their real activities and ownership.

This January, the New York Stock Exchange began the process of delisting three Chinese telecom companies…. The administration said the three firms are owned or controlled by China’s military.

No one wants to damage the investment portfolios of American retirement savers. But the dark side of this exposure is what may become of U.S. resolve to stand up to Beijing if 180 million Americans realize that up to 20% of their retirement funds are locked into Chinese securities. These Americans would suddenly have a personal, vested interest in opposing any future sanctions or other penalties against China, regardless of the geopolitical sense or national security implications. That prospect should encourage Congress to move sooner rather than later.

President Ronald Reagan knew the weaknesses of the Soviet Union. Unlike his predecessors, he did not focus on countering their strengths, but by exploiting those problems of life under a Marxist-Leninist regime that were impossible for them to fix. Reagan’s policies targeted many weaknesses – religious, political, military, and cultural among them – but his focus on Russia’s economic problems exposed those other weaknesses by choking the regime’s ability even to throw money at other problems.

Today, the most pressing threats do not come from Russia. They come from the growing power exerted by China. So, the question becomes: Can we apply these today lessons to China? With the massive, worldwide reach of China, its economic power and military build-up combine to pose strategic threats to the U.S. and the free world. Reagan’s strategy, however, can counter these threats and reduce others posed by the Chinese dragon.

China’s greatest financial weakness remains its continued dependence on Western capital markets, crucial for a growing economy that, if official statistics are to be believed, is trying to rebound from the COVID-19 pandemic’s toll. To grow, China depends on massive inflows of capital that surge through the capital markets based in the U.S. The Trump administration made several moves during its term to delist Chinese companies that are not forthcoming about who really owns them and what businesses they are really engaged in.

In addition, since 2013, Chinese state-owned enterprises have enjoyed exemptions from Sarbanes-Oxley and other regulatory requirements that also force greater transparency from these companies. They were the only ones granted these exemptions while still being listed on New York stock markets. What if those exemptions were removed?

Trump’s moves towards forcing Chinese companies to conform to the financial transparency required of other companies was a great start — but if they are to work, these policies must be continued and even strengthened by the Biden administration. The threat of being de-listed from U.S. stock exchanges would force these companies into the light. For a Biden administration that has said it wants to protect American investors and look out for America’s national interests, strengthening his predecessor’s efforts makes perfect sense.

First, many US investors have been scammed by investments in Chinese companies. Luckin Coffee was a recent example. Its top executives fraudulently inflated their sales figures by 2.12 billion yuan ($300 million). The fraud extended so deeply into the company that its shares were delisted from the Nasdaq exchange.

There are also many Chinese military-linked companies using Western capital markets to modernize their companies through investments. Among these companies is, for example, the noxious, party-controlled Hikvision. This company is responsible for the artificial intelligence facial recognition technology used to identify and track ethnic Uyghurs in China today. Hikvision even makes the surveillance cameras that glower at them inside the Chinese concentration camps where as many as two million Uyghurs are forcibly detained by their own government.

Roger Robinson — the chairman of the Prague Security Studies Institute and in the 1980s, a member of the Reagan administration’s National Security Council — was intimately involved in the economic warfare waged against the crumbling Soviet Union. He sees the opportunity to do so again with China. In a speech at Hillsdale College, Robinson pointed out that China has more than 700 companies in U.S. stock and bond markets or capital markets. Eighty-six Chinese companies are listed on the New York Stock Exchange, about 62 in the NASDAQ, and more than 500 in the OTC market.

These companies are attractive to investors, including those looking for the dynamic growth Chinese firms claim to be driving. They are represented in millions of investment portfolios for IRAs and pensions, but without having to show the same kind of financial transparency expected of other firms. Hikvision might be the most egregious example we know about, but as Robinson asked in his speech, “do any of us have the financing of concentration camps in mind when we transfer money into our retirement and investment accounts?”

“We can no longer allow China’s authoritarian government to reap the rewards of American and international capital markets while Chinese companies avoid financial disclosure and basic transparency, and place U.S. investors and pensioners at risk,” wrote U.S. Sen. Marco Rubio (R-FL) last June.

Rubio recognized the eye-popping fact that American investors are unwittingly funding technology to oppress the Uyghurs and even to finance weapons systems for the People’s Liberation Army (PLA). This is possible because, as Robinson notes, the U.S. has no security-minded screening mechanism for our capital markets, which manage more than $35 trillion in assets.

The only relevant screening in the US happens through the same government body that approved the sale of Uranium One to Russian government-backed investors, called the Committee on Foreign Investment in the United States (CFIUS). Congress expanded CFIUS’s reach in 2018 because it was worried about Chinese entities stealing American technology and undermining our security. But CFIUS is consulted when a foreign company wants to buy an American company that may produce strategically important materials or “dual-use” technologies.

Yet, U.S. capital markets currently have no such insulation. So we have capital markets which freely trade the shares of companies that have violated international sanctions, sold our adversaries advanced ballistic missiles, armed the PLA, and helped militarize the fabricated new islands in the South China Sea. These companies freely receive investment dollars from ordinary Americans saving for their retirement, unaware of their real activities and ownership. There are companies trading now whose employees have been arrested for espionage or are known cyber criminals.

As Rubio and the Trump administration understood, only Congress can change this. By pressing Congress, the Biden administration has the chance to check the Chinese grasp for power and a fearsome lever to help do so. Removing any favorable treatment for Chinese companies from the required regulatory paperwork that other companies must supply is just the beginning. Investors need to know the truth about the Chinese companies competing for their money in the capital markets. To be real, Chinese companies, nearly all of which are state-owned enterprises, need the threat of delisting from capital markets.

To return to Reagan’s strategy, this effort must be part of a broader strategy to hurt China’s ambitions on the world stage. The trade war unleashed by Trump and his tariffs hurts Chinese commerce, as it should. But if China’s access to capital markets in the U.S. comes at the price of transparency, as it does for every other company, this will severely restrict Beijing’s ability to manage the damage from the trade war.

This January, the New York Stock Exchange began the process of delisting three Chinese telecom companies, after Trump signed an order barring any transactions in securities “designed to provide investment exposure to such securities, of any Communist Chinese military company, by any United States person.” The administration said the three firms are owned or controlled by China’s military.

As Roger Robinson also warned, it is estimated the Chinese have attracted nearly $2 trillion of American investment in equities alone. For Americans, this exposure will only grow greater if China is not forced by the capital markets to play by the same rules as everyone else. He estimated in 2019 that within the following 36 months, if nothing is done, U.S. exposure will be two to three trillion dollars more than it is today. The Chinese are desperate for the dollars from the investment portfolios of the American people.

No one wants to damage the portfolios of American retirement savers. But the dark side of that exposure is what may become of U.S. resolve to stand up to Beijing if 180 million Americans realize that up to 20% of their retirement funds are locked into Chinese securities. These Americans would suddenly have a personal, vested interest in opposing any future sanctions or other penalties against China, regardless of the geopolitical sense or national security implications. That prospect should encourage Congress to move sooner rather than later.

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