Congress’ Narrow Inquiry into U.S. Investment in China is not a Winning Strategy

Writing in The Washington Times this week, Roslyn Layton examined the current inconsistencies in the United States’ regulatory approach towards curbing investment in Chinese military proxies. As we covered recently, President Biden issued an executive order that would require “U.S. firms to notify the federal government if they invest in some lower-end semiconductor production not already covered by export controls.” 

In Congress, the U.S. House Select Committee on the Chinese Communist Party sent letters to financial firms BlackRock and MSCI this month, notifying their CEO’s that the Committee was investing the companies’ investments into certain Chinese companies. The letter states “Americans are now unwittingly funding PRC companies” that develop technologies for the People’s Liberation Army (PLA).

Layton notes that this allegation is “particularly troubling,” especially as a further examination “shows this is a more systemic issue than just something one or two rogue investment companies participated in.” Ignites, a financial trade outlet affiliated with the Financial Times, reported that at least “57 asset managers [that] had at least one mutual fund or ETF invested in the companies listed by the select committee as of June 30, according to Morningstar Direct data.” Similarly, Vanguard was reported to have $200 million more invested in these potentially black-listed companies than BlackRock had.

In an opinion piece published by The Washington Post last week, Rep. Mike Gallagher—though his Committee singled out BlackRock and MSCI—rightfully acknowledged the issue is larger than one or two rogue financial institutions, writing, “these firms are not alone. Investment in problematic Chinese companies is rampant across Wall Street and Silicon Valley.” It is a positive sign that hopefully there is more to come on this front from the Committee.  The current “game of whack-a-mole,” Layton writes, will fail to address the problem as a whole. As we noted last month, China has grown considerably adept at blurring the lines between private companies and state-backed entities, standing up new proxies when one of these state-operated entities are identified. While actions such as President Biden’s recent executive order are promising, comprehensive reform must follow in its wake. “This case-by-case approach—the inquiries into BlackRock and MSCI being the latest manifestations—is like plugging holes in the dam with Uncle Sam’s fingers. New leaks will emerge until the dam is rebuilt,” says Layton. Congress must adopt a full-picture strategy to combat all potentially troublesome investments in China—not just a select few. Read Rosyln Layton’s column here.