China Experts Allegedly Withdrew From Congressional Hearing Over Fear of CCP Backlash

China Experts Allegedly Withdrew From Congressional Hearing Over Fear of CCP Backlash
Rep. Brad Sherman at the hearing Smart Competition: Adapting U.S. Strategy Toward China at 40 Years in Washington on May 8, 2019. (Jennifer Zeng/The Epoch Times)
10/26/2021
Updated:
10/26/2021

Multiple potential witnesses pulled out of a congressional committee hearing on U.S.–China economic relations because of fear of backlash from the Chinese Communist Party (CCP), according to Rep. Brad Sherman (D-Calif.), chairman of the House Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.

Sherman made the disclosure at the outset of the Oct. 26 hearing, which was convened to examine risks to U.S. investors posed by Chinese companies and other foreign issuers.

“We have great witnesses here today, but the most articulate witnesses are those who are not here today,” he said. “Their decision to pull out of this hearing due to pressure—economic pressure—speaks loudly to China’s strong economic power over politics and economics here in the United States.”

Rep. Bill Huizenga (R-Mich.), the ranking Republican on the committee, expressed shock at Sherman’s assertion, asking for more details. Sherman declined to identify the potential witnesses, but indicated they come from the finance sector.

“I’m not here to end any careers on Wall Street by explicitly identifying names,” Sherman responded. “There are those who we were in discussions with, some who actually agreed to come testify. But they notified us they decided that it was in the interest of their careers that they not appear before us.”

The witnesses who did appear were Karen Sutter, a specialist in Asian trade and finance at the Congressional Research Service; Samantha Ross, the founder of AssuranceMark, the Investors’ Consortium for Assurance; Eric Lorber, a director at the Foundation for Defense of Democracies; and RWR Advisory Group senior analyst Claire Chu.

The hearing touched on a wide array of China topics—including IP theft, espionage, and the CCP’s treatment of the Uyghur Muslims—but was focused on U.S. investors buying stock in Chinese companies. The hearing follows the disastrous initial public offering by Chinese ride-hailing company Didi Global Inc. in June, when it raised $4.4 billion in U.S. markets only to have the Chinese regime begin an investigation into the firm days later—causing Didi’s stock to tank.

China’s opaque corporate structures and legal system make investing in Chinese companies a risky business, the witnesses said.

China’s restrictions on foreign ownership of its companies are seen as a major reason for much of this risk.

Because they can’t accept investments that would result in foreign ownership, Chinese companies resort to raising capital through offshore corporate structures, witnesses said. For instance, a U.S.-traded entity might own a Cayman Islands shell company that has a contractual relationship with the Chinese firm.

“These structures arguably make it difficult for U.S. investors to assess potential risks,” Sutter said. “These complex corporate structures also separate the underlying company and its operations and assets from U.S. investors. This potentially limits the ability of U.S. investors to exercise their rights, including the right to seek full legal recourse if necessary.”

Ross said a particularly acute problem is Chinese firms not making proper audit disclosures to the Securities and Exchange Commission. Ross was referring to the fact that China’s government has allegedly blocked its auditing firms from having their work inspected by U.S. regulators.

“China-based companies’ free-riding on U.S. markets, without complying with U.S. audit regulations, increases fraud risks for investors in those companies,” she said.

Congress aimed to address this issue in December 2020 when it approved the Holding Foreign Companies Accountable Act, which requires foreign companies to be delisted from U.S. markets if they fail to meet audit disclosure requirements for three straight years.

The legislation may also reveal which Chinese firms have direct ties to the CCP. Once the SEC has finalized its rulemaking on the law, Chinese firms “will be required to disclose the percentage of shares owned by government entities in which the company is incorporated and whether these government entities have a controlling financial interest in the firm,” according to a subcommittee memo on the legislation.

“Firms will also have to disclose information related to any board members who are officials of the Chinese Communist Party and whether the articles of incorporation of the issuer contain any charter of the Chinese Communist Party,” the memo says.

The Accelerating Holding Foreign Companies Accountable Act—introduced at the Oct. 26 subcommittee hearing—would reduce the original legislation’s timeline for delisting to two years.