Back to General Resources

Systemic Risk: The Chinese Communist Party’s Threat to U.S. Financial Stability

House Select Committee on the Chinese Communist Party
Systemic Risk: The Chinese Communist Party’s Threat to U.S. Financial Stability
Tuesday, September 12, 2023 

Topline

  • Members on both sides of the aisle discussed concerns with U.S. investment in Chinese companies and called for greater transparency.
  • Chair Gallagher asked if Congress should mandate publicly traded companies to disclose their exposure to the PRC.

Witnesses

  • The Honorable Jay Clayton, Former Chairman, Securities and Exchange Commission
  • Mr. Jim Chanos, President and Founder, Kynikos Associates
  • Ms. Anne Stevenson-Yang, Founder, J Capital Research

Opening Statements
Select Committee Chairman Mike Gallagher (R-Wisc.)

In his opening statement, Gallagher noted that security leaders have warned that the CCP represents the largest threat to American security for years. He said it’s clear the CCP is preparing for war and warned that business leaders are ignoring the risk of China’s military. Gallagher explained that China could be invading Taiwan and killing our allies and our own service members with equipment and technology that we are selling them. He warned that every day we fund the CCP’s military complex and delay support to Taiwan, we make war more likely. Gallagher emphasized that the entire American economy would be in jeopardy if China invades Taiwan. He compared American investors in China to frogs in boiling water for their refusal to respond to increasing risks. Gallagher concluded that Wall Street should think twice about investing in Chinese companies that are involved in genocide and human rights violations.

Select Committee Ranking Member Raja Krishnamoorthi (D-Ill.)
In his opening statement, Krishnamoorthi discussed how the Committee’s recent travels reinforced that people across America are being harmed by Chinese policy. He explained that people working in almost every sector are harmed by intellectual property theft, while Americans who invest in Chinese business do not have the same consumer protections as other stocks because Chinese businesses do not offer transparency. Krishnamoorthi emphasized that it is the job of Congress to ensure less risk and more certainty for Americans, which is why Congress has devoted bipartisan attention to Chinese investment practices, semiconductors, and supply chains.

Testimony
The Honorable Jay Clayton, Former Chairman, Securities and Exchange Commission
In his testimony, Clayton explained that the world has never seen two large, complex economies like the U.S. and China be so intertwined while at odds in modern times. He called for accountability, transparency, and stability in the financial system, noting that it would be easier to engage in the international economic sector if our partners were committed to those common values. Clayton noted the private sector’s remarkable ability to act when given clear and coherent direction from government and cited the private sector’s response to sanctions against Russian. Clayton concluded by considering what the response would look like if we adopted a similar approach with China.

Jim Chanos, President and Founder, Kynikos Associates
Chanos was unable to attend the hearing because of flight issues.

Anne Stevenson-Yang, Founder, J Capital Research
In her testimony, Stevenson-Yang agreed with Clayton on the importance of providing investors with information. She explained that the U.S. has a deep and broad economic relationship with China and said the two countries can’t decouple from one another. Stevenson-Yang noted the U.S. and China are at odds with each other on key issues including transparency, copyright violations, intellectual property theft, and human rights violations. She said we need to stop letting the wolf warrior class intimidate us and called for strengthening sanctions. Stevenson-Yang cited the targeted sanctions during the last Administration and recent restrictions on the semiconductors sector as good first steps. She concluded that we need to invest in our own economy, industries, and strengths.

Question & Answer
Outbound Investment
Rep. Darin LaHood (R-Ill.) noted that we are at a twenty year low for investments in China. He said witnesses have called for Congress to regulate investments in China, and cited President Biden’s recent Executive Order on outbound investment. LaHood asked if Clayton agreed that the U.S. should severely curtail outbound investment in China, and if so, where Congress should draw the line. Clayton noted that he is not an expert in the area, but said the Executive Order was a good first step.

LaHood asked if the CCP’s behavior warranted restrictions in outbound investment, citing China’s support of Russia, intellectual theft, and human rights violations. Clayton said we should restrict investments with China, but noted the financial sector isn’t great at determining foreign policy. He explained the financial sector is better at following government regulations and policies.

Risk & Regulation
Gallagher said that Congress should step up and act, explaining that Congress can make an agreement with the private sector that provides businesses with the knowledge and time to adjust. Clayton agreed, noting the market hates uncertainty. He explained that if investors have information about the level of risk, they will respond to it.

Rep. Seth Moulton (D-Mass.) said if he was an investor, he would be concerned that the U.S. is funding human rights violations and an eventual war. He said he would also be concerned about general risk and urged Congress to decide how it will be involved with risk regulation.

Moulton asked if regulations should be business specific or industry specific. Clayton stressed transparency, noting it’s difficult to make investment decisions if our countries are not candid. He said that if the information isn’t adding up, government regulators need to step in. Clayton concluded that it’s easier to do industry specific sanctions for certain areas. Stevenson-Yang said American regulators need more power, noting that the audit failure rate is exceptionally high. She said we need to use the same standards with China as we do with any other country.

Moulton asked if Congress should be looking at delisting Chinese companies, and if we have enough regulatory power. Clayton said the SEC is the most powerful regulatory body in the world but noted it has limited power to regulate international investments.

Moulton asked if the SEC should have more international powers. Clayton noted the long-standing view has been that local powers will regulate international companies but admitted that approach doesn’t apply well to Chinese companies. He explained it’s more about managing risk than increasing the SEC’s international reach.

Rep. Ashley Hinson (R-Iowa) said businesses and individual Americans deserve transparency. She warned that the CCP is trying to undermine American businesses, particularly the agricultural and tech sectors. She asked witnesses about the most concerning avenue they have seen the CCP use to exploit American businesses. Clayton noted there is no transparency, which means we can’t estimate risks. He explained this is a threat to international market stability. Stevenson-Yang agreed, adding that there is no regulator in China who is watching IPOs, and called for increased oversight.

Hinson asked about what Congress can do to support businesses that are facing an uphill battle with China and repeat IPO offenders. Stevenson-Yang said we could give more regulatory power to the World Trade Organization.

Disclosures
Gallagher asked which basic steps Congress can and should take to address information needs for investors. Stevenson-Yang explained that investors need more information about which companies are connected to the military and which are engaged in forced labor. She noted that when investors get this information, they back off.

Gallagher noted that almost everyone the Committee has met with to discuss Chinese investments has asked for their identity be kept secret. He noted that shows how difficult it is to mount support to work on this issue, before asking if Congress should mandate publicly traded companies to disclose their exposure to the PRC. Clayton explained that while he generally opposes mandated disclosures, he would support a pilot program for companies with high interactions with the PRC. He said the mandate would be about providing investors with information about the risks of these companies in the event of an abrupt decoupling. Clayton noted that American companies were very transparent about the issues they faced during the pandemic, which gave investors confidence in the markets.

Variable-Interest Entities (VIEs)
Krishnamoorthi cited testimony that the VIE structure is illegal under Chinese law and noted the CCP is threatening these structures, which would hurt investors’ assets. Stevenson-Yang said China is willing to do things like this to ensure their dominance. Krishnamoorthi asked if this would hurt American investors, and she replied that it would.

Gallagher asked about what an investor owns when they invest in VIEs and which shareholder protections are included with VIEs. Stevenson-Yang explained that when one invests in a VIE, they own a stream of revenue, not profit. She noted that profit is not permitted under Chinese law, and said companies sign documents allowing them to throw off investors if needed.

Moulton asked if Congress should end VIEs, and if so, what the ramifications would be. Stevenson-Yang called for a gradual approach, noting it would harm American investors if VIEs were ended immediately. She added that the Holding Foreign Insiders Accountable Act is a good step in that direction. Clayton said the Holding Foreign Insiders Accountable Act does a good job of giving markets time to adjust. He emphasized that any regulation that impacts existing investments would need a similar timeline.

Decoupling & Derisking
LaHood asked if China’s behavior has improved or worsened over the past twenty years. Clayton explained that twenty years ago, the U.S. thought that our principles and norms would develop in China due to its international economic integration. He noted that that hasn’t happened, and said now, the question is will it happen eventually, or do we need to take a pause on this relationship?

LaHood asked the witnesses if they have any confidence that the Chinese will change their ways.   Clayton said the U.S. and China have seen great economic benefits from their relationship, noting that one would think that if we were talking about a full decoupling, China would wake up and start looking at these changes we’re talking about. Stevenson-Yang agreed but specified that the early relationship between the two countries was defined by a technology gap, which is no longer the case. She added that the relationship has also been defined by the lack of a regulatory environment in China.

Rep. Haley Stevens (D-Mich.) cited her concerns about industrial markets in the Midwest, noting that capital investments and venture capital investments are down. She added that she is concerned about what that means for the supply chain, and asked what it means for American investors. Stevenson-Yang said the Midwest market is investing in China as a means of offshoring. She called for investors to diversify and invest in other countries like Vietnam, emphasizing that it would be a huge blow to the economy if China closes up.

Krishnamoorthi said we should not be investing in companies that support the modernization of the Chinese military, assist in espionage, hurt our country, or who are involved with human rights violations or genocide. He noted that Congress has a duty to offer clarity and direction on these issues and urged Wall Street to divest from these companies. Krishnamoorthi asked Wall Street not to be part of the problem, noting that while they have the right to do these things, it is not the right thing to do.

 

For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.