Congress should remove Chinese SOEs from U.S. capital markets

There are clear differences in U.S. policy toward China. On the one hand are American consumers and defense hawks concerned about the rise of China. On the flip side are Wall Street investors and pundits urging broader trade with Beijing. That tension is now at a peak as Congress considers legislation to help U.S. tech companies better compete with China. But even as members of Congress weigh proposals to revise U.S.-China policy, they should recognize one overriding concern—the need to weed out Chinese bad companies from U.S. financial markets.

For decades, Chinese companies have raised trillions of dollars by selling securities on the New York Stock Exchange and other markets. At present, thousands of Chinese companies and their subsidiaries are still raising capital in the US capital market. In fact, the U.S.-China Economic and Security Review Commission (USCC) has identified 261 Chinese companies listed on the three major U.S. stock exchanges, including eight state-owned enterprises, with a combined market capitalization of $1.4 trillion.

The dangers of sending U.S. money to Chinese companies have actually increased in recent years. In 2018, the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board warned investors that U.S. regulators face challenges in overseeing companies doing business in China and Hong Kong. Since then, China has withheld documents requested by the PCAOB. Many of these Chinese companies are complicit in Beijing’s military objectives, industrial expansion and human rights abuses.

In February, the House of Representatives passed the U.S. Competition Act — legislation designed to promote U.S. competition with China. The bill is now competing for consideration with another Chinese bill, USICA, that passed the Senate last summer.

The House and Senate are currently trying to combine their respective bills into a final China package. This is also where the American people should be concerned, as Congress is debating a provision requiring annual reporting of Chinese companies in U.S. capital markets.

Both the House and Senate bills initially included language to identify companies that could undermine U.S. national security, violate international human rights standards or pose a risk to U.S. investors. For the American people, such a request seems like a no-brainer. Unfortunately, Congress is now hesitant about this requirement in its final China legislation.

The original House and Senate provisions may differ slightly, but Congress should definitely require annual oversight of U.S. financial markets. And to do that, the State Department should take the lead. That’s because the State Department is the cross-agency head of human rights and foreign affairs — and has the ability to address the nuances of international policy and human rights issues. Of course, the Treasury also has a role to play. But such reports must be as reliable as possible — in order to understand the threats lurking in U.S. capital markets. This includes index funds, ETFs and Chinese hedge funds — not just the big names listed on the NYSE.

To protect U.S. investors, these reporting requirements must be thorough and complete. A combination of the original House and Senate language will be most effective. The Senate’s “Section 3407” wording—derived from the Strategic Competition Act—would involve State Department leadership. The wording in House “Section 30133” requires a comprehensive and robust report on the physical presence of Chinese financial businesses in U.S. capital markets.

As recent polls show, Americans overwhelmingly favor the use of economic tools to address China’s predatory trade problems. They don’t want Chinese companies raising capital in U.S. financial markets to bolster Beijing’s global ambitions.

As Congress considers proposals to compete with China, lawmakers should insist on full reporting of Chinese entities in U.S. capital markets. Members of Congress should combine Section 3407 in the Senate with Section 30133 in the House to provide the best protection for American investors. Otherwise, Congress may fail to address major strategic issues — and allow U.S. investors to unknowingly fund the Chinese Communist Party’s ambitions.

The decision should be obvious — transparency and accountability are in America’s interests, not Beijing’s and Wall Street’s.

• Robby Stephany Smith is National Security Advisor to the Coalition for a Prosperous America.