China's Infiltration of US Capital Markets: A Risk to America
As published in Newsmax.
March 22, 2021.
"Greed … is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit," according to Gordon Gekko. The Chinese Communist Party (CCP) counts on the mindset of the Wall Street money-machine elite to finance its national ambitions in the deepest, most liquid capital market in the world — our own.
Until recently, we ignored the massive capital transfusion in excess of $2.2 trillion from our stock exchanges to the CCP, our existential enemy — and the risk this represents to American investors and our national security.
Thanks to President Trump, we have heard much about China's predatory trade practices harming Americans. But, according to Roger Robinson, Jr., former chairman of the Congressional U.S.-China Economic and Security Review Commission, the real battleground isn't trade, it's the capital markets. "China is content for us to concentrate on … trade. Can they handle a tariff war? Yeah, it's painful, but yeah, they can, they can play that game all day…. But the U.S. capital market funding is where they live or die."
China depends on massive inflows of American capital to help finance its economy and its military. A decrease in our investment dollars would hurt them immeasurably more than a trade war.
As of October 2, there were 217 Chinese companies, including 13 state-owned enterprises, with a market value about three-quarters the size of China's foreign exchange reserves, listed on the U.S. exchanges. In addition, there are companies which rely on offshore registration to disguise their primary Chinese corporate domicile, making it difficult to identify all Chinese companies engaged in our capital markets.
Starting in 2018, the world's largest index provider, MSCI, increased its holdings of Chinese companies in its widely followed Emerging Markets Index, reportedly in response to heavy pressure by the Chinese government. Other indexes followed their lead. Asset managers of pension funds, mutual funds and exchange-traded funds held by millions of Americans did the same to align their investments with this index.
Wall Street financial institutions like Goldman Sachs, JPMorgan Chase, BlackRock and Citigroup have made huge profits by underwriting the American listing of Chinese companies like Alibaba, PetroChina, Baidu, CNOOC and Tencent. China and Wall Street both profit, and if these companies are delisted, both suffer.
Private as well as state-owned Chinese companies can be enlisted in activities to benefit China's national interests. Beijing's 2017 National Intelligence Law states, "any organization or citizen shall support, assist, and cooperate with state intelligence work," essentially allowing the weaponization of any Chinese company to commit espionage, technology theft or anything deemed to be in China's national interest.
China refuses to comply with existing American securities laws like Sarbanes-Oxley (2002) and other regulations that require both transparency and U.S. oversight of financial data reporting for all companies trading on our exchanges. The CCP claims such disclosure endangers their national security. In 2019, Luckin Coffee manipulated its financial data prior to its American IPO. It achieved a $12 billion capitalization before collapsing on news of fraud, leading to American investor loss without recourse for compensation.
Last June, Senator Marco Rubio, R-Fla., expressed outrage: "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."
American investors have purchased shares of Chinese corporate human rights abusers like Hikvision and Dahua, involved with the tracking and surveillance of the persecuted Chinese Muslim minority Uyghurs. They have financed national security abusers like Huawei and China Telecom, involved in espionage and disruption of U.S. communications traffic.
Sen. Rob Portman, R-Ohio, voiced displeasure: "The Chinese Communist Party uses its state-owned enterprises to further its cyber and economic espionage efforts against the United States, and they've been exploiting our telecommunications networks for nearly two decades while the federal government historically put in little effort to stop it."
In response to President Trump's November 2020 executive order barring any transactions in securities "designed to provide investment exposure to … any Communist Chinese military company, by any United States person," the Defense Department placed 35 Chinese companies with links to the Chinese military (here, here and here) on a "blacklist."
In December 2020, President Trump signed the bipartisan Holding Foreign Companies Accountable Act (HFCAA), to close U.S. stock markets to foreign companies that do not comply with our financial data oversight. It also requires public companies to disclose whether they are owned or controlled by a foreign government. Non-compliance results in delisting.
Finally, in early January, the New York Stock Exchange delisted three blacklisted companies — China Telecom, China Mobile and China Unicom. Global index providers MSCI, S&P Dow Jones, FTSE Russell and Nasdaq also started removing military-linked Chinese companies from their portfolios.
Beijing is threatening unspecified "countermeasures" and offering possible legal compensation to Chinese companies for the damage done from non-compliance with U.S. transparency regulations.
The CCP sees itself as engaged in a long-term systemic struggle with the United States over the future world order. It uses its growing economic and military power to encourage other nations to accept its authoritarian one-party governance model as a superior alternative to liberal democracy, with the ultimate goal of replacing America as the world's only superpower. The American public understands the threat. In a recent Pew poll, most Americans support a tough stance toward China on economic issues and human rights.
In the past, we were too timid to enforce our laws, let alone strengthen them. Thanks to a bipartisan effort under Trump administration leadership, that has changed. Naysayers on Wall Street object to this as politicizing the markets and restricting the free flow of global capital to the detriment of investor return.
President Trump's screening and regulatory actions are a great beginning; but to be effective, they must be fully enforced by the Biden administration. Disclosing the results of financial audits to investors and identifying and delisting Chinese corporations endangering our national security are fundamental to protecting our capital markets and our citizens.
Senator Marco Rubio wrote, "Biden will have to make many tough choices. But when it comes to China's exploitation of U.S. capital markets, the choice facing him is simple: support American workers and our national security, or side with Wall Street and the CCP."