Monitor and Restrict American Investment in China: Commission

By Naveen Athrappully
Naveen Athrappully
Naveen Athrappully
November 19, 2021 Updated: November 19, 2021

A commission of security and economic experts convened by Congress set forth a series of recommendations on Wednesday regarding the relationship with China, as bilateral trade returns to pre-trade-war levels and U.S. investments in the communist-controlled nation are on the rise.

The annual report (pdf) from the influential U.S.-China Economic and Security Review Commission called for the country’s leaders to take more proactive steps in reducing U.S. investor exposure to China, adopt stricter measures to curb authoritarianism, and monitor the influence of Chinese Communist Party (CCP) committees within businesses, among other proposals.

The commission’s report follows the Monday meeting between President Joe Biden and Chinese leader Xi Jinping, and seeks to highlight the increasingly aggressive nature of the ruling CCP, and how to safeguard U.S. national and economic security interests in the complicated relationship.

Some of the commission’s key recommendations include prohibiting investment in Variable Interest Entities (VIE) linked to Chinese entities, for example, Alibaba. When you invest in Alibaba (BABA) on NYSE, you don’t technically own shares in the company, but invest in an offshore entity, such as a company in the Caymans, with a claim to the company’s profits.

If the CCP decides to forbid Chinese companies from using VIEs, which are illegal in China, to raise funds from international markets, American investors will be left with nothing. The recent clampdown on tech companies in China is aggravating investor fears leading to tech shares stumbling.

China’s increasing aggression towards neighboring Taiwan is noted by the commission, which suggested “authorizing and funding the deployment of large numbers of antiship cruise and ballistic missiles in the Indo-Pacific,” along with stockpiling precision munitions towards upholding the obligations established in the Taiwan Relations Act.

In the current scenario where the CCP’s influence is growing in businesses in China, the commission has recommended the monitoring of such activities. “Publicly traded U.S. companies with facilities in China report on an annual basis whether there is a CCP committee in their operations.”

China finds numerous loopholes to gain access to western markets even during the presence of sanctions, for example, through shell companies based in Hong Kong. When a company based on the mainland is sanctioned by one U.S. authority, a proposal has been suggested to sanction it under all other authorities. This is especially applicable to those companies named in the Entity List.

Then, there is the recommendation to track all portfolio investments in China whether it is done directly or through offshore centers. As a response to the clampdown on Uyghurs, the U.S. Customs and Border Protection agency has received suggestions to impose restrictions on products originating from Xinjiang. This will affect corporations like Nike, Apple and Amazon who employ contractors and source raw materials from the region.

The powerful commission has supporters from both ends of the political aisle seeking its advice in formulating policies. Members are appointed by Democratic and Republican leaders of the House and Senate and come from various backgrounds. Carolyn Bartholomew is the chairwoman of the panel, and a senior aide to House Speaker Nancy Pelosi.

Altogether, 32 recommendations were handed over for congressional consideration.