OPINION:
In today’s 24-hour news cycle and social media echo chambers, it might be easy to conclude that political gaps between Democrats and Republicans are greater than ever — and growing. On many issues, they are.
Yet from Pennsylvania Avenue to Main Street, Americans find common ground in at least one area: China’s threat to U.S. national and economic security.
In Washington, consensus on both sides of the political aisle has coalesced around the alarming realization that China represents the most serious threat to U.S. interests.
The recently passed National Defense Authorization Act identifies China as “America’s primary competitor” and “the only nation with both the intent and the capability to mount a sustained challenge to the United States’ security and economic interests.”
As for the White House, it has toed a delicate line to de-escalate (or at least moderate) tensions while tightening the overdue controls to curb the flow of U.S. technologies and investment to the Chinese government and military. The administration has frequently messaged conflicts as “competition” rather than using harsher and perhaps more realistic terms. Democrats and Republicans on Capitol Hill have been more direct.
“The authoritarian regime of the Chinese Communist Party is trying to reshape the international order to supplant U.S. leadership,” Rep. Maxine Waters, California Democrat, told the House Financial Services Committee earlier this year. In the same hearing, Rep. Patrick McHenry, North Carolina Republican, called China “the single greatest threat to America’s global standing.”
Concerns about China’s ambitions are not relegated to inside the Beltway, either. Recent polling shows that half of Americans (50%) say China poses the greatest threat to the United States. By comparison, only 17% named Russia.
But despite mounting consensus, the U.S. regulatory framework to prevent the flow of investment and technology to Chinese businesses has been more a game of whack-a-mole than a well-formed stop net. That was made clear by a recent congressional investigation of two well-known and highly esteemed U.S. financial firms, BlackRock and MSCI.
Last month, the House Select Committee on the Chinese Communist Party advised the firms that it was launching an inquiry into whether they had channeled investment to Chinese companies blacklisted by U.S. regulators. As a “direct result” of decisions made by the firms, a letter from the committee’s chairs states, “Americans are now unwittingly funding PRC companies that develop and build weapons for the People’s Liberation Army (PLA).”
That’s a particularly troubling allegation, especially considering that further reporting has come out that shows this is a systemic issue rather than something one or two rogue investment companies participated in.
For example, Ignites, a subsidiary of the Financial Times, reported that at least 57 asset managers “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,” representing $2.2 billion of capital invested in Chinese companies highlighted in the select committee’s letter.
Some of those asset managers with significant Chinese exposure include big-time players such as Fidelity, State Street and Vanguard. Incredibly, that report noted that Vanguard was reported to have $200 million more invested in the potentially problematic companies than letter recipient BlackRock had.
While it’s hard to imagine that such prominent companies could knowingly fund bad actors without detection, it does seem to call out a failing of U.S. government policy to uniformly address potential holes in the system.
But unless the same scrutiny is applied across the entire financial services sector, the committee’s initial investigation may not address the broader problem. If policymakers are earnest about stopping funding to companies controlled by the Chinese government, they should focus on changing the rules for all U.S. investors.
Congress’ foray into BlackRock and MSCI is eerily analogous to efforts to stop the Chinese military from acquiring sensitive U.S. technologies. As I have written about extensively, the U.S. regulatory regime has for years sought to identify and sanction American companies that (intentionally or not) provide tech to Chinese state-operated entities on a case-by-case basis.
That was and is a losing battle because the Chinese government has virtually blurred the line between its public and private sectors — and it is adept at standing up new proxies as soon as U.S. authorities identify one.
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. Sadly, ordinary Americans whose wealth and retirements are managed by the next-to-be-investigated firm will be the real victims in this game of picking winners and losers.
Fortunately, there does appear to be an appetite for comprehensive reform that creates a level playing field for U.S. companies, both in finance and technology. Last month, President Biden signed an executive order to begin a rulemaking process to establish new boundaries for investment into tech that the Chinese military could exploit.
In July, the Senate approved an amendment to the National Defense Authorization Act from Sens. John Cornyn, Texas Republican, and Bob Casey, Pennsylvania Democrat, to screen investment in national security sectors in “countries of concern,” including China. Other legislation, like the Chinese Military and Surveillance Company Sanctions Act and the Dump Investments in Troublesome Communist Holdings Act, would further tighten controls, creating a clearer rule set for investors.
This full-picture strategy is the only way to adequately prevent U.S. investments from benefiting China’s military and authoritarian government. If Congress is serious about solving the root of the problem, it should focus on comprehensive reform. Otherwise, the Chinese government and military will continue to gain the upper hand in a never-ending game of whack-a-mole.
• Roslyn Layton is co-founder of China Tech Threat.
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