The White House receives a push to restrict US investment in Chinese stocks and bonds

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The chairman of a US congressional committee has called on President Joe Biden to expand forthcoming restrictions on investments in China to include stocks and bonds, arguing that anything less would not effectively address the security threat posed by Beijing.

Mike Gallagher, chair of the House China committee, wrote to the president, stating that the new executive order expected from the White House should encompass US participation in Chinese public markets, not just private equity and venture capital investments.

“Public market investments make up the majority of US capital flows to the People’s Republic of China. Any rules that exempt them would not effectively address the national security threat,” wrote the Republican representative from Wisconsin in a letter dated August 3 and seen by the Financial Times.

In his letter, Gallagher highlighted that a significant portion of the approximately $1.3 billion US investment in China supports “the Communist party’s abhorrent human rights abuses” and entities connected to the People’s Liberation Army.

The upcoming executive order from President Biden, expected next week, follows previous efforts to limit Chinese access to US technology in sectors such as semiconductors, artificial intelligence, and quantum computing. Its aim is to restrict the flow of US capital to organizations affiliated with China’s military.

On Tuesday, the House China committee accused BlackRock, the world’s largest asset manager, and MSCI, a stock market index compiler, of profiting from investments that benefit the Chinese military.

US officials have indicated that the new order will require companies to report their investments in sensitive sectors to the government and may lead to certain investments being prohibited. However, there are concerns that the order may be weaker than desired by some within the administration due to lobbying efforts by US companies and certain allies.

“If American capital continues to flow to Chinese military companies, we are at risk of funding our own destruction,” Gallagher warned the Financial Times.

“Wall Street needs to understand that investing in critical technology sectors in the PRC endangers our military service members, supports the victims of the Chinese Communist party’s human rights abuses, and poses systemic risks to the global economy. It’s a dangerous combination that the American people did not request and do not want,” he added.

Gallagher suggested that the order should provide investors with predictability by avoiding an unnecessarily burdensome case-by-case screening process. He also urged the administration to persuade allies to implement similar restrictions.

Efforts by the Biden administration to build consensus with international partners have been complicated by differences in legal systems and some allies’ reluctance to adopt a position as hawkish as certain US figures would prefer.

Japanese officials stated that they do not plan to introduce a similar screening mechanism, as it would have loopholes if companies could route investments through countries like the Cayman Islands.

During an EU summit in June, leaders, including Germany’s Olaf Scholz, did not express significant concerns about the US measures, indicating their satisfaction with the compromises reached through months of discussions between the US and G7 partners. They believed that unity among the G7 countries was more valuable than division.

“Of course we have different perspectives…we are prepared to have a stable and constructive relationship with China,” said a senior EU diplomat. “But the US recognizes the added value of our collective strength.”

The new executive order comes as the Biden administration seeks to update export controls introduced in October of last year. Major companies like Intel and Qualcomm have expressed worry about these efforts to senior officials, and the delay has caused frustration among some allies.

Japanese government officials have expressed frustration over the US’s failure to update controls, despite previously pressuring Japan and the Netherlands to align their measures with those of the US.

One of the Japanese officials, noting the potential “watering down” of the US outbound investment screening from earlier drafts, remarked, “It’s almost as if they’re suddenly afraid of upsetting China.”