Taking Stock of "China, Inc.": Examining Risks to Investors and the U.S. Posed by Foreign Issuers in U.S. Markets, House hearing transcript (October 26, 2021), GovInfo CHRG-117hhrg46245, PDF
Summary
The House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, chaired by Brad Sherman, examined on October 26, 2021 the risks to investors and the U.S. posed by foreign issuers in U.S. markets, under the title "Taking Stock of China, Inc." Sherman cited Luckin Coffee, Evergrande and DiDi, saying Luckin Coffee showed the need for good audits overseen by the Public Company Accounting Oversight Board (PCAOB). Sherman named bills before the subcommittee, including the Accelerating Holding Foreign Companies Accountable Act and the Uyghur Forced Labor Disclosure Act. The witnesses were Karen M. Sutter of the Congressional Research Service, Samantha Ross of AssuranceMark, Claire Chu of RWR Advisory Group and Eric Lorber of the Center on Economic and Financial Power.
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TAKING STOCK OF ‘‘CHINA, INC.’’: EXAMINING
RISKS TO INVESTORS AND THE U.S. POSED
BY FOREIGN ISSUERS IN U.S. MARKETS
VIRTUAL HEARING
BEFORE THE
SUBCOMMITTEE ON INVESTOR PROTECTION,
ENTREPRENEURSHIP, AND CAPITAL MARKETS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
OCTOBER 26, 2021
Printed for the use of the Committee on Financial Services
Serial No. 117–56
(
U.S. GOVERNMENT PUBLISHING OFFICE
46–245 PDF WASHINGTON : 2022
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK MCHENRY, North Carolina,
NYDIA M. VELÁZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESÚS ‘‘CHUY’’ GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
CHARLA OUERTATANI, Staff Director
(II)
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SUBCOMMITTEE ON INVESTOR PROTECTION, ENTREPRENEURSHIP,
AND CAPITAL MARKETS
BRAD SHERMAN, California, Chairman
CAROLYN B. MALONEY, New York BILL HUIZENGA, Michigan, Ranking
DAVID SCOTT, Georgia Member
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois FRENCH HILL, Arkansas
GREGORY W. MEEKS, New York TOM EMMER, Minnesota
JUAN VARGAS, California ALEXANDER X. MOONEY, West Virginia
JOSH GOTTHEIMER. New Jersey WARREN DAVIDSON, Ohio
VICENTE GONZALEZ, Texas TREY HOLLINGSWORTH, Indiana, Vice
MICHAEL SAN NICOLAS, Guam Ranking Member
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois BRYAN STEIL, Wisconsin
EMANUEL CLEAVER, Missouri VAN TAYLOR, Texas
(III)
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CONTENTS
Page
Hearing held on:
October 26, 2021 ............................................................................................... 1
Appendix:
October 26, 2021 ............................................................................................... 43
WITNESSES
TUESDAY, OCTOBER 26, 2021
Chu, Claire, Senior Analyst, RWR Advisory Group .............................................. 8
Lorber, Eric, Senior Director, Center on Economic and Financial Power, Foun-
dation for Defense of Democracies ...................................................................... 10
Ross, Samantha, Founder, AssuranceMark, The Investors’ Consortium for
Assurance .............................................................................................................. 7
Sutter, Karen M., Asian Trade and Finance Specialist, Congressional Re-
search Service (CRS) ............................................................................................ 5
APPENDIX
Prepared statements:
Chu, Claire ........................................................................................................ 44
Lorber, Eric ....................................................................................................... 68
Ross, Samantha ................................................................................................ 77
Sutter, Karen M. ............................................................................................... 85
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Hill, Hon French:
Written statement of the American Securities Association .......................... 100
McHenry, Hon. Patrick:
Written statement of the Coalition for a Prosperous America ..................... 103
Written statement of the Center for Capital Markets Competitiveness,
U.S. Chamber of Commerce ......................................................................... 112
Committee on Capital Markets Regulation, ‘‘Assessing the Future of U.S.
Listings by Chinese Companies: A Call for Structured Dialogue’’ ............ 116
Meeks, Hon. Gregory W.:
Written responses to questions for the record submitted to Eric Lorber ..... 152
Written responses to questions for the record submitted to Karen Sutter .. 153
(V)
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TAKING STOCK OF ‘‘CHINA, INC.’’:
EXAMINING RISKS TO INVESTORS
AND THE U.S. POSED BY FOREIGN
ISSUERS IN U.S. MARKETS
Tuesday, October 26, 2021
U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON INVESTOR PROTECTION,
ENTREPRENEURSHIP, AND CAPITAL MARKETS,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:06 a.m., via
Webex, Hon. Brad Sherman [chairman of the subcommittee] pre-
siding.
Members present: Representatives Sherman, Scott, Himes, Fos-
ter, Vargas, Gottheimer, Gonzalez of Texas, Axne, Casten;
Huizenga, Wagner, Hill, Emmer, Mooney, Davidson, Hollingsworth,
Gonzalez of Ohio, Steil, and Taylor.
Ex officio present: Representative Waters.
Also present: Representative Barr.
Chairman SHERMAN. The Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets will come to order.
Without objection, the Chair is authorized to declare a recess of
the subcommittee at any time. Also, without objection, members of
the full Financial Services Committee who are not members of this
subcommittee are authorized to participate in today’s hearing.
Today’s hearing is entitled, ‘‘Taking Stock of ‘China, Inc.’: Exam-
ining Risks to Investors and the U.S. Posed by Foreign Issuers in
U.S. Markets.’’
I will now recognize myself for 4 minutes for an opening state-
ment. I believe the Chair of the Full Committee, Chairwoman
Waters, will be here soon for a 1-minute opening statement as well.
If not, I will also claim her 1 minute and reiterate some of the
same points.
The intertwining of the American and Chinese economies has
given China substantial power here in the United States. It really
hasn’t given America any power, political power in Beijing.
We have great witnesses here today, but the most articulate wit-
nesses are those who are not here today. 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.
There are those who think that we shouldn’t encourage or allow
investment in China because it means American capital is flowing
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to their economy, but let us remember that this is a two-way
street. Some $1.2 trillion of American capital is invested in China
in their securities, not to mention $116 billion of direct investment.
But some $2 trillion of Chinese capital is invested in American se-
curities.
But we do have to make sure, if it is going to be a two-way
street, that it is a fair street. We have heard of Luckin Coffee,
Evergrande, and DiDi.
Luckin Coffee tells us that we need good audits and good over-
sight of those audits, and that the Public Company Accounting
Oversight Board (PCAOB) needs to oversee the audits.
DiDi illustrates the issue of whether the boards of directors of
companies are loyal to the shareholders, and whether the corpora-
tions have property rights that are protected by the courts of
China, or whether you, in fact, are investing in a company whose
assets could disappear due to capricious government action.
The SEC has created special rules for foreign private issuers,
based on the idea that, say, that private issuer from abroad is from
the United Kingdom, where you get all of the investor protection
from the host country. And then, we will just add a little bit of
American investor protection; we don’t need all of the usual Amer-
ican investor protection. That model obviously needs to be turned
on its head in dealing with China, where you get little or no inves-
tor protection from the home country.
We see that China is able to pressure index funds to include Chi-
nese companies, but it is not Chinese companies that are in the
index funds. An index fund may choose to put the 1,000 biggest
companies in the world in the index, but you can’t buy Alibaba; you
buy Alibaba of the Cayman Islands.
Now, Alibaba is one of the 1,000 biggest companies in the world,
but Alibaba Cayman Islands—the Cayman Islands isn’t even one
of the thousand biggest islands in the world. You are investing in
a shell company, that invests in another shell company, that has
a contractual relationship with Alibaba. Does that belong in an
index?
But we do see that China is able to pressure Morgan Stanley and
others to include these questionable entities in indexes. Now, when
you invest in China, you are investing in a police state to some de-
gree, one that imprisons a million Uyghurs in Xinjiang.
We will be discussing a number of bills here before us, two that
were noticed early, the Accelerating Holding Foreign Companies
Accountable Act, and a second one which deals with the Uyghur
Forced Labor Disclosure Act.
I have also quickly, in advance of this hearing, distributed bills
designed to force a review by the SEC of the special status they
give private foreign issuers to see if that is relevant to companies
based in China. And a bill to prohibit a phony name from being
used; you shouldn’t call yourself, ‘‘Alibaba,’’ if you are not,
‘‘Alibaba,’’ but you are really, ‘‘Cayman Islands Alibaba.’’ And fi-
nally, we will get into the variable interest entities (VIEs), which
are not real companies, and whether they belong in indexes.
At this point, I will recognize the ranking member for his open-
ing statement, and I wonder whether I should recognize him for 4
minutes or for 5 minutes? Do you have the whole Republican time?
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Mr. HUIZENGA. Yes, at this point, I do and—
Chairman SHERMAN. Then, I will recognize you for 5 minutes.
I now recognize the ranking member of the subcommittee, the
gentleman from Michigan, Mr. Huizenga, for 5 minutes.
Mr. HUIZENGA. Thank you, Mr. Chairman.
Actually, before I get into my comments, I am curious if you
could clarify two things? One, those bills that you were just talking
about, were they noticed for this hearing, or did you just introduce
them? Because we were not aware of them.
Chairman SHERMAN. Those are, at most, discussion drafts that
I circulated just yesterday. And—
Mr. HUIZENGA. Okay.
Chairman SHERMAN. —they are among the many things that will
be discussed here today.
Mr. HUIZENGA. Okay. Well, I am looking forward to getting our
hands on those and having that conversation. And then, I would
appreciate it, too, if you would clarify—you mentioned the four wit-
nesses that we have before us, but you mentioned that there were
some others who either refused or didn’t come or felt pressure, be-
cause I fully believe that. We have seen that with, whether it is
entertainment companies, others, the NBA. There has been a lot of
pressure, but I am curious if you could clarify that?
Chairman SHERMAN. I am not here to end any careers on Wall
Street by explicitly identifying names. There are those with whom
we were in discussions, some who had actually agreed to come tes-
tify, then notified us that they decided it was in the interest of
their careers that they not appear before us. We decided not to
have one of those witnesses in the House Foreign Affairs Com-
mittee, where we have had people who might be subject to torture.
We have had screens and muffled voices there, but we chose not
to do that here.
Mr. HUIZENGA. Understandable. I am going to reclaim my time,
because I do need to get through my statement, and I, too, am not
in the business of endangering that, but certainly that is a signifi-
cant, serious accusation that is getting thrown out. So, I think it
is important that we begin this hearing by level setting and ac-
knowledging what is really happening with China and the Chinese
Communist Party (CCP). We often just use the acronym and kind
of blow over what it actually stands for.
China is gearing up for a fight to attempt to replace the U.S. as
the premier world leader, both economically and geopolitically. Chi-
na’s preparation to compete with us relies on ensuring that the
CCP’s control is absolute. That is exactly what the CCP has been
working towards. It is critical that we, as policymakers, acknowl-
edge this fact. If we don’t, we are missing a bigger picture and a
bigger threat, and doing so will lead to short-sighted half measures
in response to China’s threat.
I am a little afraid we may be losing sight with today’s hearing.
I just want to make sure that we are not. China’s threat is far
greater than just that of investment-related risk. It is far more
multidimensional, and therefore, we have to be far more multi-
dimensional.
Legislation like the Holding Foreign Companies Accountable Act
(HFCAA), which passed on a bipartisan basis last Congress, rep-
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4
resents one of the important pieces that should be a well-rounded,
multi-pronged approach from Washington. It properly corrected an
investor protection imbalance whereby China- and Hong Kong-
based companies were operating under different rules than every-
one else. That certainly cannot stand.
But we should be focusing on how to complement the HFCAA
with policies pulled from a diverse toolkit beyond the securities
laws. For example, attempting to deal with the threat of China
through mandatory disclosures that are unrelated to financial ma-
teriality for foreign policy purposes, I believe is also a bit short-
sighted. These disclosures will not likely change China’s behavior,
especially considering these disclosure requirements would be ap-
plicable to all public companies, no matter where they are incor-
porated.
The SEC tends to be the wrong agency to address national secu-
rity and human rights issues, and we have seen that before with
things like the failed conflict minerals provisions of the Dodd-
Frank Act, et cetera.
For example, we should be sanctioning Chinese firms instead
that pose national security threats, and imposing export controls to
deprive these Chinese firms—(government)—of advanced tech-
nologies needed for their quest for global dominance.
Fostering entrepreneurship and encouraging business activity
should be another policy priority of ours to deal with China’s
threat. Chinese regulators have been cracking down on their own
entrepreneurs and shutting them off from foreign investment. So,
we have an opportunity here, folks.
In response, doubling down on American economic growth
through innovation and promoting economic freedom would be a
tremendously effective approach for us in contrast to the top-down
authoritarian approach of the CCP.
Again, we have an opportunity. Let’s seize it. Fostering entrepre-
neurship and encouraging business activity are squarely within our
subcommittee’s jurisdiction and explicitly within the SEC’s mission.
So, let’s discuss those policies. Outcompeting China in the long
term will depend on American economic growth. If we are only fo-
cused on addressing China through ineffective mandatory disclo-
sures, and not growing our economy, then we are choosing to face
the threat of China with both hands tied behind our back.
And with that, I yield back.
Chairman SHERMAN. I thank the distinguished ranking member
for his statement.
I will now recognize the Chair of the full Financial Services Com-
mittee, Chairwoman Waters, for 1 minute, and also indicate that
if Chairwoman Waters wants to be the first questioner, that would
be my honor as well.
Chairwoman WATERS. Thank you, Chairman Sherman. I am very
pleased that you are holding this hearing today.
Our capital markets are the envy of the world, raising trillions
of dollars for large and small businesses, and supporting the retire-
ment and savings of investors. Our markets work because partici-
pants have to play by the rules.
For example, companies that want to raise capital, gain the trust
and confidence of investors by providing access to reliable and ac-
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curate financial information. Our regulators then have unhindered
access to both this information and those who audit the informa-
tion.
However, some jurisdictions, like the People’s Republic of China,
have created obstacles to this effective oversight and are under-
mining the bedrock of investor confidence. So, I look forward to re-
viewing the actions that Congress and the SEC can take to protect
our markets.
I thank you, and I yield back my time.
Chairman SHERMAN. Thank you.
Today, we welcome the testimony of our distinguished and, in
some cases, courageous witnesses: Karen Sutter, a specialist in
Asian trade and finance with the Congressional Research Service;
Samantha Ross, the founder of AssuranceMark, The Investors’
Consortium for Assurance; Claire Chu, a senior analyst with RWR
Advisory Group; and Eric Lorber, the senior director of the Center
on Economic and Financial Power at the Foundation for Defense of
Democracies.
Witnesses are reminded that their oral testimony will be limited
to 5 minutes. You should be able to see the timer on your desk in
front of you that will indicate how much time you have left. When
you have 1 minute remaining, a yellow light will appear. I will ask
you to be mindful of the timer, and when the red light appears, to
please wrap up very quickly.
And without objection, your written statements will be made a
part of the record.
Ms. Sutter, you are now recognized for 5 minutes.
STATEMENT OF KAREN SUTTER, SPECIALIST IN ASIAN TRADE
AND FINANCE, CONGRESSIONAL RESEARCH SERVICE (CRS)
Ms. SUTTER. Good morning. Chairman Sherman, Ranking Mem-
ber Huizenga, distinguished members of the subcommittee, thank
you for inviting the Congressional Research Service to testify
today.
I would like to raise six points today for your consideration.
To start, I would like to discuss how China is selectively opening
its financial markets to a few U.S. investment firms, allowing them
to expand China offerings to U.S. investors. These firms see growth
opportunities in China, but their market participation is still cur-
tailed by Chinese government controls and the dominant market
position of China’s large state banks.
Some U.S. firms and investors may profit from investments in
Chinese companies, but these transactions appear to leave U.S. in-
vestors in a passive role in three respects.
One, U.S. financial investors cannot leverage the productive in-
dustrial or technological capabilities that their capital may help
China to develop.
Number two, U.S. financial investments do not appear to open
China’s economy to U.S. competition, especially in strategic indus-
tries that they fund.
Number three, the Chinese government can exercise control, in-
fluence, and discretion over U.S. investments and the underlying
business operations and assets that are in China.
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Next, I would like to discuss the limited and targeted nature of
China’s financial investment openings to date which appear de-
signed in part to attract capital, U.S. capital to areas where Chi-
na’s economy is weak, such as bad assets and debt. Increased U.S.
capital flows to China’s debt markets could create growth opportu-
nities, but also could create increased U.S. risk exposure by placing
more U.S. capital in areas where there are systemic market risks.
The Chinese government’s current efforts to address debt and over-
capacity in its property market highlights an example of such risks.
Third, the Chinese government appears to be seeking U.S. cap-
ital and expertise to fund its strategic and emerging industries, to
strengthen China’s capital markets, and to position Chinese firms
as global leaders and competitors. U.S. investors are funding some
companies that are tied to the Chinese government’s dual use in-
dustrial policies, such as Made in China 2025.
Similarly, China is investing in some U.S. firms that have tech-
nologies and capabilities that the government is seeking to advance
its goals. While these investments may promote economic growth,
offer strong returns for some U.S. investors, and provide financing
for certain firms, at the same time, they also may develop competi-
tive Chinese capabilities.
Fourth, the role of the state in China’s economy and business
ecosystem has increased dramatically since 2014, under China’s
leader Xi Jinping. This is intensifying the potential challenges and
risks in financial and commercial ties with China for U.S. compa-
nies, U.S. investors, and the United States more broadly. A signifi-
cant increase in two-way financial investment could give the Chi-
nese government greater influence over U.S. companies, as well as
the U.S. and global marketplace.
Fifth, the corporate structures that Chinese firms are using to
expand overseas and invest in U.S. capital markets, such as the
variable interest entity (VIE) are complex. These structures appear
to make it difficult for U.S. investors to assess potential risks.
While U.S. underwriters, accountants, or legal counsel may have
insights into these risks, they may not share this knowledge fully
with U.S. investors, who ultimately bear the costs of these risks.
These complex corporate structures also separate the underlying
Chinese 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.
In closing, I would like to discuss nonpublic transactions. There
appears to be a lack of transparency on deals and an absence of
publicly available data on the main and growing two-way invest-
ment pathways, which include private equity, venture capital, and
private placements. This situation is complicated by U.S. and Chi-
nese monies that appear to be increasingly commingled through
funds that operate in the United States and China.
Without greater transparency, it is difficult to assess how some
financial transactions may support related deals that could involve
the transfer of technology or know-how. Transparency gaps also po-
tentially affect the U.S. Government’s ability to assess aggregate
U.S. financial and economic exposure to China and potential risks.
Thank you for your consideration. I look forward to your ques-
tions.
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[The prepared statement of Ms. Sutter can be found on page 85
of the appendix.]
Chairman SHERMAN. Ms. Ross, you are now recognized for 5 min-
utes.
STATEMENT OF SAMANTHA ROSS, FOUNDER,
ASSURANCEMARK, THE INVESTORS’ CONSORTIUM FOR AS-
SURANCE
Ms. ROSS. Thank you.
Chairman Sherman, Ranking Member Huizenga, Chairwoman
Waters, and members of the subcommittee, I am pleased to appear
before you today to discuss the significant risks that investors face
from China-based companies that benefit from access to U.S. mar-
kets but do not comply with the important investor protections
under U.S. law.
My testimony is based on my experience of over 18 years serving
in the Division of Enforcement at the SEC, where I gained first-
hand knowledge of fraudulent accounting practices by foreign pri-
vate issuers, and at the Public Company Accounting Oversight
Board (PCAOB), where I helped design audit oversight rules and
initiatives that laid a framework to protect investors in foreign
companies that issue securities in U.S. markets.
The PCAOB’s job is to oversee and inspect the auditors of compa-
nies that access U.S. public capital markets. Eight hundred and
forty non-U.S. accounting firms from more than 80 jurisdictions are
registered with the PCAOB in order to be able to prepare or par-
ticipate in the preparation of audit reports provided to U.S. inves-
tors and submitted to the SEC.
Not all of these firms actually do so, though, but when they do,
the PCAOB is required to inspect their work to ensure that their
audits comply with our standards. Both independently and through
numerous cooperative agreements with local authorities, the
PCAOB is able to inspect firms in all relevant jurisdictions except
Mainland China and Hong Kong.
The People’s Republic of China’s (PRC’s) resistance to the
PCAOB’s inspections is not just a theoretical compliance issue. Our
markets are being tested by a string of frauds by China-based com-
panies that obtained capital from our markets but failed to comply
with our investor protection rules.
By enacting the Holding Foreign Companies Accountable Act and
continuing vigilant monitoring through hearings such as this one,
Congress is playing a critical role in signaling that companies that
seek access to capital from U.S. markets must adhere to our rules.
I also commend the SEC and the PCAOB for the decisive ap-
proach they are taking to implement the Holding Foreign Compa-
nies Accountable Act.
A great body of research documents the benefits that foreign pri-
vate issuers obtain by issuing securities in the United States.
Those benefits include a lower cost of capital than they would face
in their home-country capital markets. The linchpin of these bene-
fits is the binding commitment companies make to our standards,
including high-quality financial reporting requirements and a reli-
able third-party audit. Enforcement of this commitment, rather
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8
than relying on mere assertions of compliance, is what distin-
guishes U.S. listings and produces their capital market benefits.
PCAOB inspections are a critical component of our enforcement
regime. Inspections examine whether third-party auditors are, in
fact, holding companies to their commitments to produce high-qual-
ity and reliable financial reports. There is empirical evidence that
capital markets find financial reporting more credible following in-
troduction of PCAOB inspections in non-U.S. jurisdictions. That is,
investors put more faith in financial reporting when the PCAOB is
able to inspect.
China-based companies free-riding on U.S. markets, without
complying with U.S. audit regulations, increases fraud risks for in-
vestors in those companies. But that is not the only reason why it
is important to stop the free-riding. It also harms our markets
more broadly. The benefits I have described exist because partici-
pation in our markets means something. It is a signal of the qual-
ity and reliability of the financial reporting of the companies that
list here.
As we saw in the days of the Enron scandal, when any group of
participants fails to comply with our standards, that sends a signal
that weakens confidence in the whole market. For the benefits to
continue to flow to compliant U.S. and non-U.S. companies, it must
be clear that we enforce our standards across-the-board.
In conclusion, audit regulators around the world cooperate in
PCAOB inspections of registered firms’ audits of companies that
offer securities in the United States. The PRC is the only govern-
ment that blocks them. This causes serious harm to both investors
in such companies, as well as our public capital markets more
broadly.
I commend the work you have done to put an end to these
harms, as well as the work the SEC and the PCAOB have done to
implement the Holding Foreign Companies Account Act. Based on
the heightened risks evident from a string of frauds that have al-
ready been revealed, it will also be important to ensure that China-
based companies that are prohibited from trading on our public
markets do not turn to other ways to access U.S. capital. And
therefore, I commend your continued vigilance.
Thank you.
[The prepared statement of Ms. Ross can be found on page 77 of
the appendix.]
Chairman SHERMAN. Thank you for your testimony.
Ms. Chu, you are now recognized for 5 minutes.
STATEMENT OF CLAIRE CHU, SENIOR ANALYST, RWR
ADVISORY GROUP
Ms. CHU. Chairman Sherman, Ranking Member Huizenga, and
distinguished members of the subcommittee, thank you for the op-
portunity to testify before you today.
I am a senior analyst at RWR Advisory Group, a research and
advisory firm based here in Washington, D.C., where I specialize
in the geopolitical and national security risk implications of China’s
commercial activity and overseas engagement.
I have been asked to provide some context on the nature of Chi-
nese corporate actors and their role in China’s state-led economy.
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9
I will also lay out several risks to investors and the United States,
followed by recommendations.
The Communist Party of China’s (CCP’s) involvement, influence,
and control over the commercial sector means that Chinese compa-
nies are beholden to the party-state and can be compelled to sac-
rifice corporate interests for government favor. Corporate actors are
directed to meet state planning targets, and CCP officials are em-
bedded within the operations of large companies to ensure regu-
latory compliance.
The government essentially has the power to determine whether
a company is allowed to raise capital, provide goods and services,
or even continue to operate as a for-profit enterprise. There are
clear incentives for companies to welcome CCP guidance and to op-
erate in ways that are conducive to the state’s interests. Companies
can also be subjected to coercive and arbitrary punishment for
crossing party-state lines.
The heavy-handed, reactive nature of the Chinese regulatory ap-
paratus can sometimes undermine its own companies and, by ex-
tension, American investors in those very companies. China’s re-
cent regulatory broadside has left the U.S. financial industry grap-
pling with the challenge of quantifying the effect of government
corporate intervention. This kind of uncertainty has a material ad-
verse impact on companies and investors, who cannot be sure if
IPOs will go ahead or if entire industries will be banned from rais-
ing funds in the capital markets.
What really amplified the impact of this latest spate of regu-
latory action and made it front-page news was the high level of
global financial exposure to the stocks of those affected companies.
The Chinese government prioritizes state stability and social con-
trol over commercial gains. The more intertwined the U.S. and Chi-
nese markets become, the more acutely U.S. investors will feel the
aftershocks of Beijing’s politically driven market interventions.
The U.S. commitment to high-quality, reliable disclosures and fi-
nancial reporting is a key element of its ability to protect investors
and market participants.
The Chinese party-state’s sweeping bureaucratic authority,
opaque legal system, and complex corporate structures obscure,
often intentionally, a Chinese company’s beneficial ownership and
financial realities. Beijing also uses lack of transparency as an eco-
nomic advantage, creating information asymmetries to control and
moderate foreign flows into the Chinese market. These China-spe-
cific risk factors make it particularly challenging for U.S. regu-
latory authorities to conduct proper due diligence and can prevent
U.S. investors from being able to make informed investment deci-
sions.
Variable interest entities (VIEs), for example, are legally ambig-
uous corporate structures used by Chinese companies to list on
U.S. exchanges. VIE shareholders have no recourse. The operating
company’s underlying assets and the moral hazard risks are sub-
stantial.
Chinese companies seeking to issue unregistered securities in the
United States are able to circumvent strict standards by taking ad-
vantage of the SEC safe harbors, like Regulation S and Rule 144A.
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10
With the rapid inclusion of China A-shares into major stock indi-
ces, the expansion of Stock Connect schemes, and the quadrupling
of A-share weighting in certain benchmarks, U.S. investor access to
the publicly-traded Chinese companies has expanded dramatically
over the past few years. Index providers like MSCI and FTSE Rus-
sell have become a power force, serving as intermediaries and gate-
keepers between Chinese companies and U.S. markets, exercising
virtually unchecked, unregulated authority over the volume of U.S.
capital flows to China.
The criteria evaluated by index providers to support inclusion
and weighting decisions are limited to standardized attributes, like
market cap and liquidity, and neglect to consider the reputational
and China-specific factors like state-sanctioned human rights
abuses or financial exposure to party-state policymaking.
U.S. retail and institutional investors are consequently exposed
to a wide range of Chinese companies engaged in activities that are
contrary to the national security and foreign policy interests of the
United States. Many are already sanctioned by the U.S., but not
subject to any capital markets restrictions, no investment restric-
tions, or divestment mandates, and are thus able to continue rais-
ing capital in the U.S. markets.
The current U.S. securities regulatory framework will need to
evolve with greater, more targeted oversight, disclosure enforce-
ment, China-specific due diligence, and sanctions alignment to re-
spond in kind to the unique risk associated with this influx of secu-
rities listed overseas in institutional environments where the dis-
closure requirements and corporate governance practices don’t offer
the same protections for investors as in the United States.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Chu can be found on page 44 of
the appendix.]
Chairman SHERMAN. Thank you.
And Mr. Lorber, you are now recognized for 5 minutes.
STATEMENT OF ERIC LORBER, SENIOR DIRECTOR, CENTER
ON ECONOMIC AND FINANCIAL POWER, FOUNDATION FOR
DEFENSE OF DEMOCRACIES
Mr. LORBER. Chairman Sherman, Ranking Member Huizenga,
and distinguished members of the committee, I am honored to ap-
pear before you today to discuss the risks to investors and the
United States posed by Chinese issuers in U.S. markets.
I come before this committee as a sanctions and compliance pro-
fessional, having worked at the U.S. Department of the Treasury,
and advised financial institutions, corporations, humanitarian orga-
nizations, and individuals on ensuring they operate in compliance
with their legal sanctions obligations. As part of my work in both
the public and the private sectors, I have seen firsthand the power
of U.S. economic sanctions in furthering U.S. foreign-policy objec-
tives, and while sanctions are not a panacea, they can be used in
narrow and targeted ways to great effect.
One area where the United States has increasingly used this tool
is in the global competition with China. As Congress and the Biden
Administration consider ways to protect U.S. markets from abuse
and push back against certain Chinese activities that threaten U.S.
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11
national security, sanctions remain one of the top policy levers to
consider pulling.
Safeguarding transparency in the global financial system and in
U.S. markets is critical to protecting U.S. national security and the
strength of the U.S. financial system. A core part of providing this
transparency is ensuring that U.S. investors have access to rel-
evant material information about foreign companies in order to
make informed decisions. Over the last few years, the United
States has taken important steps to ensure that Chinese companies
attempting to access U.S. markets must play by the same rules as
U.S. companies, and do not produce significant material risk in
U.S. investors’ portfolios due to their lack of financial transparency.
At the same time, we must balance those considerations against
the risk of creating an onerous set of disclosure requirements that
deter companies from seeking to access U.S. markets or that make
it overly burdensome to do business here in the United States.
Such burdens can deter legitimate companies from seeking financ-
ing on U.S. capital markets. This is a delicate balance to strike.
As Congress and the Administration weigh whether to create
new reporting and disclosure requirements and determine how to
best protect U.S. investors, they should likewise consider the use
of narrowly-targeted sanctions which offer a well-established tool to
ensure U.S. companies and U.S. national security are protected
from certain threats.
The United States has a range of sanctions tools to target spe-
cific Chinese companies whose activity it believes poses national se-
curity risks. In particular, over the last few years, the United
States has deployed limited, but powerful, prohibitions on trading
in public securities of certain Chinese companies allegedly associ-
ated with the People’s Liberation Army, or otherwise alleged to be
involved in China’s civil military fusion program.
Likewise, for companies or individuals who are alleged to engage
in particularly egregious actions, this targeted approach may be a
narrow and effective way to limit these companies’ or persons’ ac-
cess to U.S. markets and to U.S. capital more broadly.
In addition to sanctions designations, the U.S. Department of the
Treasury also has effectively promulgated advisories and guidance
warning the private sector of doing business with certain compa-
nies or in certain sectors, including in Chinese industries. For ex-
ample, the Treasury Department, along with its interagency part-
ners, issued a supply chain advisory designed to warn the private
sector about the risk of human rights abuses and forced labor in
Xinjiang.
These tools could provide a narrow, targeted way to warn U.S.
companies and investors of the risks of doing business with certain
Chinese companies or in particular industries, as well as limit the
ability of those Chinese companies that threaten U.S. national se-
curity from securing capital on U.S. markets.
I look forward to your questions, and thank you again for the op-
portunity to testify.
[The prepared statement of Mr. Lorber can be found on page 68
of the appendix.]
Chairman SHERMAN. I want to thank all tof he witnesses for
their testimony.
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12
I now recognize the Chair of the Full Committee, Chairwoman
Waters, for 5 minutes for questions.
Chairwoman WATERS. Thank you very much, Mr. Chairman.
Ms. Sutter, it is reported that many China-based companies de-
sire to be listed on the U.S. stock exchanges not only because our
markets are large and liquid, but because our stock exchanges per-
mit initial public offerings, or IPOs, with something called dual
class share structures. Dual class structures allow elite share-
holders, most often company founders and executives, to have a
disproportionately large portion of the company voting power.
This structure has been used by many companies from Mainland
China. In fact, at least 5 of the top 10 U.S.-listed China-based com-
panies have dual class structures. What I find interesting is that
China’s own exchanges, or the London Stock Exchange, for exam-
ple, ban the practice of dual class structures for IPOs.
Ms. Sutter, how does the dual class share structure permitted by
our stock exchanges create risk to our investors? Why do China-
based companies make use of this structure? Should our exchanges
limit China-based companies’ ability to offer dual class share struc-
tures?
I find this situation very interesting, and I question whether or
not we can question China, when we use the same structures? And
if we are questioning them because, as I am told, China has more
control over these big business, these owners, these top business
people, and they direct them and they can tell them what to do,
and somehow that is a difference between what they do and what
we do, can you help me out with this discussion?
Ms. SUTTER. Sure. Chairwoman Waters, thank you very much for
the question.
I think with the dual class share issue, generally there are
broader considerations that I do not focus on. I will narrow in on
the China element in particular.
As you mentioned, the Chinese companies do take advantage.
They do use the dual class share structure. This has also become
a competitive issue within China. Since 2018, the Hong Kong ex-
change, and then, starting in 2019, the China exchanges have
started to consider and adopt this dual structure.
The one thing I would highlight in considering how the Chinese
companies may use this structure is that in addition to this legal
element, this formal element of dual class shares, that within the
Chinese system itself, not all shareholders are equal. I would high-
light to you that in looking at the government restructuring of com-
panies like the property developer Evergrande, or the restructuring
of companies like HNA Group, at the end of the day, the govern-
ment is also often a shareholder or has a direct economic interest
in a lot of these companies. It does not always play kind of a disin-
terested role, shall we say, and so I think it is important that even
if the dual class share issue were to be resolved, that underlying
this structure are these inherent asymmetries in the role of the
state in a lot of Chinese companies.
In the case of HNA, basically what they determined is that al-
though there were 300 or more subsidiaries that had been created
for the company, at the end, the Chinese government was the ac-
tual controlling shareholder.
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Chairwoman WATERS. Do you think that dual class share struc-
tures are basically good for us, as opposed to China, and that we
should support what we do because somehow it advantages our
economy in some way or it advantages the way that we treat inves-
tors? Do you think it is good?
Ms. SUTTER. I don’t have a specific opinion on the structure
itself. I think the main point I would emphasize is that in addition
to the formal structure, there is an informal structure in Chinese
companies that, regardless of how they list, this influence of the
state and actual controlling shareholders and ultimate beneficiaries
is embedded within the corporate system, either formally or infor-
mally, separate from even how they list in China or then how they
might list on a foreign market such as the United States.
Chairwoman WATERS. Thank you very much.
Mr. Chairman, I am going to yield back my time, but I think this
is an issue that needs a lot more discussion. I yield back.
Chairman SHERMAN. I couldn’t agree with you more.
And I now recognize the ranking member of the subcommittee,
Mr. Huizenga, for 5 minutes.
Mr. HUIZENGA. Thank you, Mr. Chairman.
Before I get into my time, I do have a parliamentary inquiry. It
is the Minority’s belief that the inclusion of this list that your staff
had sent over to us of three bills that do not even have bill num-
bers at this point actually doesn’t qualify as congressional testi-
mony. It is not properly noticed for us, and frankly, even more im-
portant, not properly noticed to the public and those affected by
that.
I guess I would just note that these bills were not properly no-
ticed because, at least at this point, it looks like they don’t even
have bill numbers, and do you then intend to have an actual hear-
ing on these bills?
Chairman SHERMAN. It is the practice of the committee to cir-
culate discussion drafts. Of course, discussion drafts do not have
bill numbers. Some of the most important legislation, I believe, has
been discussed as drafts without H.R. numbers.
Discussion drafts of bills at today’s hearings do satisfy the
McGovern Rule, which requires that a bill has a legislative hearing
before it goes to the Floor. That being said, it is my expectation
that either the full committee or more likely the subcommittee will
have a more general hearing on capital markets issues, which will
provide a second opportunity to discuss these bills before they go
to the Floor.
Mr. HUIZENGA. Furthering my parliamentary inquiry, the rules
do state a 3-day notice. That was not what happened, just so we
are clear, and all on the same page with that. So, at this point, I
guess I would like to—unless you have something more to add on
the parliamentary inquiry, I am happy to take my time for the
questioning now.
Chairman SHERMAN. You are recognized.
Mr. HUIZENGA. Thank you.
Mr. Lorber and others, you have made some interesting notes on
what has been happening with China. Obviously, we have seen
large tech companies like DiDi and Ant Group, Chinese companies
that either have or were planning to go public in the U.S., have
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14
been targeted by Beijing. It is clear that China believes it is ready
to directly compete with U.S. markets for the title of premier global
economy.
What I am curious about is your take on how serious is the CCP
at all on this crackdown, and are we looking at kind of a financial
version of Tiananmen Square here with their entrepreneurs and
their folks that have been innovative? And along those lines, what
can we do here in the U.S. to improve the market situation to
make sure that we are competitive?
I don’t want to be Gulliver among the Lilliputians, with a whole
bunch of other people who have terrible policy and we have slightly
better policy. I want to have the gold standard, the U.S. dollar gold
standard of policy here in the U.S. to make sure that we are the
leading economic force.
Mr. LORBER. Thank you, Ranking Member Huizenga.
I agree with your assessment and the assessment of other mem-
bers of this panel when they suggest that you have seen a tight-
ening of control over certain companies within China, and it ap-
pears to be led in part by the government or in full by the govern-
ment.
But I want to focus on the second part of your question because
I think that is exactly right. Ensuring that the U.S. capital mar-
kets space remains robust has all types of downstream economic,
positive economic impacts for the United States. It increases inno-
vation. It ensures that the cost of borrowing here in the United
States is low. It incentivizes non-U.S. companies to come and work
in the United States. And so, I think from sort of a perspective of
ensuring that the U.S. financial system remains strong, trying to
keep our financial markets as streamlined and as attractive as pos-
sible is an incredibly important goal.
Mr. HUIZENGA. I am curious, and along those lines, do increased
mandatory SEC disclosures not related to financial or investment
risk—I believe this has been a significant part of our conversation
on the subcommittee, and there was one of those that is proposed
here today that applies to all U.S.-listed companies, not just those
from China. What does that do to encourage U.S. economic growth,
or does it discourage it?
Mr. LORBER. It is a good question. I do think that there is a risk
of, if requiring nonmaterial disclosures, that the burdens and the
obligations that are imposed on U.S. and non-U.S. issuers will cer-
tainly create some degree of additional compliance obligations and
some degree of deterrence for companies seeking to find financing
on U.S. markets. So, I do think that there is a risk in particular
of requiring, again, disclosure related to nonmaterial information.
Mr. HUIZENGA. Ms. Ross, in your introductory materials and bi-
ography and those types of things, you talk about materiality of
disclosure. I am curious if you could very quickly touch on that as
well?
Ms. ROSS. Thank you so much, Ranking Member Huizenga.
Yes, I agree. With respect to these issues with China, it is really
not a matter of needing more new disclosures. The problem is that
these China-based companies are not even complying with our ex-
isting rules. So, I don’t think adding new disclosures will address
it. I think what we need to do is to actually enforce the existing
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15
rules and send the signal to Chinese companies and the Chinese
government that these are rules that pertain to our markets that
they must adhere to when they are in our markets.
Mr. HUIZENGA. What about a targeted sanction or something
along those lines to address the weaker situation, would you view
that more effective versus a blanket sort of SEC? Quickly, if you
want to answer that, and then I want to get to Mr. Lorber.
Ms. ROSS. Yes, sure. I agree with Mr. Lorber’s testimony that
targeted sanctions can be very effective tools. I also think when we
are talking about these China-based companies that are listed in
the U.S. markets, across-the-board they are not complying with our
rules. So, I do think across-the-board enforcement of our rules
against all of them is appropriate.
Mr. HUIZENGA. Mr. Lorber, enforcement, quickly, in my last sec-
onds.
Mr. LORBER. Yes, I agree with the assessment of sanctions. I
think you saw—particularly in the Xinjiang region, you saw the
designation in 2020, I believe, of the XPCC, the Chinese para-
military organization that was involved or alleged to be involved in
those activities, as well as the publishing of guidance to warn
about the supply chain, and I think that had a major impact on
sourcing of goods, in particular from that area.
Mr. HUIZENGA. My time has expired, but I just do want to com-
mend the Chair. I am glad we are having this conversation. This
is a conversation we need to have. We have had it in the past, but
I think the seriousness of this issue has become more crystal clear
for everyone, and I am encouraged to have this ongoing conversa-
tion.
I yield back.
Chairman SHERMAN. The gentleman has gone over time, but if
he wishes more time to praise the Chair, he will be yielded it.
Mr. HUIZENGA. The gentleman is obviously a good-looking,
wealthy, serious-minded person who is—keep going? Okay. I think
I—
Chairman SHERMAN. The gentleman’s time has expired. I now
recognize myself for 5 minutes.
Ms. Sutter, I want to pick up on your comment about selective
access, because this is one way in which China has so much power
here in the United States. I represent the movie industry in my
district, and they only allow 40 movies into China, so if you run
a studio, you want to be one of those 40 movies. And you know that
if you make a movie about Tibet, that movie isn’t getting into
China. And you know if you make a movie about Tibet, none of
your movies are getting into China.
If you are Morgan Stanley, and you want to do banking in China,
you know that you may be one of the banks that gets into China
if your global index includes Chinese companies to a sufficient de-
gree, and if you officially notify all of your customers that they
should include China to the 15-percent level or whatever level in
their portfolios.
You know that you will be allowed to do business in China if
your lobbyist is here on the Hill lobbying for China. China doesn’t
need to hire a lobbyist. They have all of them through this selective
access system.
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I want to thank Ms. Ross for focusing on the importance of the
already-passed Holding Foreign Companies Accountable Act, and
the need for us to pass the officially, definitely, explicitly-noticed
Accelerating Holding Foreign Companies Accountable Act that is
pending before this committee, and point out that the original bill
passed the Senate in light of Luckin Coffee and that it was so—
and people wonder, is there a benefit to short-selling? There is at
least one, and that is short-sellers, in this case Muddy Waters,
LLC, that focused on Luckin Coffee, and discovered the problem
there, that there was $300 million of fraudulent sales. They
brought that to their attention. They, of course, made money by
discovering that, and that short-selling can be a way to discover
those issues.
Ms. Chu, I want to thank you for pointing out to us clearly that
when you invest—we in the United States grow up with this idea
that you buy a share in a company that owns assets. Those assets
are managed in the interest of shareholders by a board of directors
loyal to the shareholders, and those assets are controlled by the
corporation, and their property interests are protected by the
courts. That is 300 years, 400 years of common law. We just as-
sume that. oh, that is what a corporate share is.
Whereas in China, the board may or may not be loyal to share-
holders, may be more loyal to the goals of the Chinese Communist
Party, and the courts may or may not enforce the property rights
of the corporation vis-a-vis expropriation or arbitrary punishment
or seizure. And yet, I don’t think Americans instinctively—they just
look at earnings per share and say oh, that company is doing well,
it must be a good investment.
Ms. Sutter, I want to focus on including VIEs in indexes and the
deceptive name. If I wanted to raise some money, I would call my
company, ‘‘GameStopped.’’ I would add an, ‘‘E–D.’’ It is a hot com-
pany. A lot of people like GameStop.
You can call a company, ‘‘Alibaba of Cayman Islands,’’ and reg-
ister shares here, and everybody thinks that is, ‘‘Alibaba of China.’’
But what you are really buying is a Cayman Islands company that
owns a Chinese company that has some sort of contractual rela-
tionship with Alibaba. Everybody in China has a contract with
Alibaba, if you have them on your phone.
Should we allow these phony names—should we allow people to
use the name Alibaba if they are not Alibaba, and should we allow
people to say that you are in an index because you are a big com-
pany when you are really just a Cayman Islands shell?
Ms. SUTTER. Thank you for the question. Would you like me to
answer—
Chairman SHERMAN. Yes.
Ms. SUTTER. Okay, I just wanted to be sure. It is interesting,
when you read a Chinese company disclosure that is submitted to
the SEC, they often will talk about the VIE structure and risks as-
sociated with the VIE structure, sometimes going on for 5 or 10
pages, and it is an interesting question about, is, ‘‘Baidu, Inc.,’’
‘‘Baidu,’’ or is, ‘‘China Mobile, Inc.,’’ ‘‘China Mobile,’’ in the sense
of how the company is advertising to investor? So, that is an inter-
esting question to consider. I think the other—
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Chairman SHERMAN. I am going to have to ask you to respond
for the record. My time has expired. It is my fault, but I have to
go on to the next questioner.
Ms. SUTTER. Okay.
Chairman SHERMAN. I now recognize the gentlewoman from Mis-
souri, Mrs. Wagner.
Mrs. WAGNER. Thank you, Mr. Chairman, and on that point, I
think maybe that is why we have copyright laws, and perhaps it
is up to the private entity and the company to exercise their copy-
right laws.
Mr. Chairman, I think today’s hearing topic is extremely timely
and necessary. America faces continued health challenges and an
economic crisis that was brought on by the Chinese government
suppressing, misrepresenting, and falsifying information con-
cerning the spread of COVID-19 in the beginning of 2020. We must
hold China accountable for their actions, which is why I have intro-
duced H.R. 3882, the Compensation for Americans Act.
I also have authored an essay with Representative Andy Barr,
whom I know will be speaking on this topic later on, which outlines
the need to strengthen the U.S. sanctions regime, which is a key
tool to denying our adversaries the resources they need to continue
their illicit behavior.
The increased mandatory risk disclosures being discussed today
will not change China’s behavior. Instead, we should be focusing on
how to better use a more targeted tool, such as sanctions or export
controls.
Mr. Lorber, America’s ability to counter China’s global domi-
nance is only effective if we focus on our strengths and leverage
America’s economic might to counter malign Chinese activities. As
has been discussed today, using our securities disclosures to ad-
vance foreign policy goals can be counterproductive.
Specifically, I think adding excessive reporting and compliance
burdens not based on information that is material to investors’ in-
vestment risk calculus typically undercuts companies’ ability to ex-
pand, innovate, and generate jobs. Will you describe, sir, how the
use of U.S. investment disclosures rules to accomplish certain pol-
icy goals compromises the strength and credibility of America’s cap-
ital markets?
Mr. LORBER. Thank you for the question, Representative Wagner.
It is a good one.
I think to a certain extent, if there are additional nonmaterial re-
porting requirements put into place for companies, it will, as I
mentioned earlier in the conversation, potentially reduce compa-
nies’ willingness to list—companies that want to list on U.S. finan-
cial markets or to access U.S. financial markets to seek that access.
So, I do think there can be a direct impact on the competitiveness
of those markets if there are nonmaterial reporting requirements
and obligations that are put into place.
Mrs. WAGNER. Will you comment, sir, also, on why the strength
of the U.S. economy and our capital markets is key to our effective-
ness abroad?
Mr. LORBER. Absolutely. As we were talking about earlier, and
as I believe Ms. Ross mentioned in her testimony, U.S. capital mar-
kets are something of a crown jewel of the U.S. economy, right?
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18
They allow for low-cost capital to be accessed. They are attractive
for companies that are abroad. They increase innovation here in
the United States. They bolster our economy here.
And so, I think that to a certain extent, especially when viewed
vis-a-vis the sort of control that the Chinese government is now ex-
ercising over its companies and some of the crackdowns that we
have seen, those markets are increasingly attractive, and I think
we should do everything we can to bolster them.
Mrs. WAGNER. Mr. Lorber, the Holding Foreign Companies Ac-
countable Act was enacted last year because the Chinese govern-
ment has actively not allowed Chinese companies listed on U.S. ex-
changes to comply with our securities laws. Is it just naive to think
that Chinese companies will comply with the Democrats’ manda-
tory SEC disclosure discussion drafts proposed today?
Mr. LORBER. I do think that additional disclosure requirements
may not be impactful in compelling Chinese companies to comply.
That is why, with the Holding Foreign Companies Accountable Act,
the 3-year cutoff enforcement mechanism, I think is an appropriate
mechanism, and for those companies that the U.S. believes pose se-
rious national security threats, so maybe not just misleading on
their financials but are actually involved in, for example, the Chi-
nese civil military program, I think targeted securities sanctions
would make sense for policymakers—
Mrs. WAGNER. In my limited time, how do other tools like sanc-
tions and export controls eliminate the question of whether or not
our rules will be, in fact, followed by the Chinese Communist
Party?
Mr. LORBER. It is a great question. I think sanctions are a nat-
ural tool that have been employed by both of the last two Adminis-
trations, the Trump Administration and the Biden Administration,
to target companies that the U.S. Government believes pose a na-
tional security threat. And in addition to that, one other thing I
would say is guidance. The Treasury and other interagency part-
ners have been really, really good in the last few years about put-
ting out informative guidance to private sector actors to warn them
of sanctions in illicit activity risks, and those companies that have
read that guidance take that into account when making risk-based
decisions.
Mrs. WAGNER. Thank you, Mr. Lorber. My time has expired. I
yield back.
Chairman SHERMAN. I now recognize the gentleman from Geor-
gia, Mr. Scott, who is also the Chair of the House Agriculture Com-
mittee, for 5 minutes.
Mr. SCOTT. Thank you very much, Mr. Chairman.
This is an extraordinarily important hearing. Right now, China’s
role in the global economy is just massive. China is the largest ex-
porter of goods in the world, with 9.6 percent of the entire global
share, and while the country’s GDP grew at its slowest pace last
quarter, expanding just 4.9 percent from the previous year, China’s
$15 trillion economy remains the second-largest in the world, sec-
ond to us in the United States. Ours is number one.
In your testimony, Ms. Sutter, you cite several factors regarding
China’s attempt to reduce debt and curtail market risk among sev-
eral large firms. Here is the question for you that I think the na-
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19
tion and the world is waiting on: Can you explain what the impact
would be for not just us, but for all of the global markets if a Chi-
nese economic collapse were to occur?
Ms. SUTTER. Thank you, Congressman, for the question.
I think there is a lot of attention right now on the situation of
China’s second-largest property developer, Evergrande. Their total
debt is about 2 percent of China’s national debt. I think it provides
some insight into some overcapacity and China’s continued depend-
ence on fixed asset investment for growth, that this is a systemic
weakness in the economy.
A lot of people argue that right now, the U.S.’s potential risk ex-
posure is manageable, but we are looking at a situation where a
lot of financial firms now having new licenses to move into China—
it has been discussed, putting more Chinese companies into fund
indices—what comes ahead. So, I think Evergrande is a case study
to look at the potential systemic risks in the market, how U.S. ex-
posure could grow over time, and what would be the U.S. recourse
in these types of situations.
Mr. SCOTT. Let me ask you this. How exactly is the dramatic
slowdown in Chinese construction projects and manufacturing,
those two things, how are they related to the growing warning
signs that we are getting of a possible shock to the global financial
markets?
Ms. SUTTER. I would say in response, I think the main thing to
keep in mind is the trouble that Evergrande and other property de-
velopers have in China arguably was started by the Chinese gov-
ernment. These are highly-leveraged companies. Evergrande’s as-
sets, 60 percent are unbuilt, unsold properties, and these compa-
nies rely on money to continue to flow so that they can continue
to pay. So, when the government stops the ability for new fund-
raising, it creates crisis in the system.
I think what you see the Chinese government doing now is trying
to avoid market contagion in property, the market more broadly,
but they are also trying to avoid moral hazard. They don’t want to
signal to companies like Evergrande that they can continue busi-
ness as usual.
The local government in China is very dependent on these prop-
erty developers for income for local government mandates. So there
is a symbiotic relationship. In the case of Evergrande, the Xinjiang
government is a direct shareholder in Evergrande.
So, I think it is the interrelationship, it is a challenge for China
to get out of this situation, and I would say the situation for the
United States is less our current exposure, it is more about we
seem to be at a juncture where there is a lot of discussion about
increasing financial exposure in areas like this in the economy.
What would that look like going forward?
Most people seem to think the current exposure, if the Chinese
are able to handle the situation, is fairly contained at this point,
although that depends on how the Chinese government handles it
going forward. It is an issue-to-watch type of scenario right now.
Mr. SCOTT. Thank you very much. That was very good informa-
tion. Thank you.
Chairman SHERMAN. Thank you. I now recognize the gentleman
from Arkansas, Mr. Hill.
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20
Mr. HILL. I thank the chairman, and I appreciate your work in
preparation of this hearing. It is certainly a topic of interest, strong
interest to Members of both parties, and I appreciate our witnesses’
preparation and being here personally. It is good to see witnesses
in person, Mr. Chairman, and not on a Zoom screen.
In the late 1980s, I spent a lot of time traveling in Asia, includ-
ing in China, and I can remember distinctly John Phelan’s famous
trip to Beijing in 1986 trumpeting the New York Stock Exchange
as a potential place for Chinese companies to list. Americans had
seen the success of the Asian Tigers by the 1980s, and I think U.S.
policymakers really believed that if we demonstrated and modeled
good behavior and opened up our markets, capital markets to
China, that we would get a good response.
And in fact, China’s capital markets did grow, access to capital
was there, and there is no doubt that free markets and capitalism
and the open trading system allowed China to create hundreds of
millions of people and move them into the middle class, and cer-
tainly, China has benefitted from this past 3 decades.
But that 30 years of progress from the open door is now seeing
that door slam shut since President Xi has turned his country into
a more authoritarian state, and turned his back on the norms in
capital markets. Consumers are no longer benefiting, but they are
now pawns in a surveillance state. The business sector is no longer
benefiting as much because markets are volatile, rules are incon-
sistent, and the state demands full control of entrepreneurship.
I don’t know if investors are benefiting or not. I think the pur-
pose of this hearing is to demonstrate that maybe they are not, be-
cause they are not getting the kind of information that a good mar-
ket like the American markets provides. The third world and
emerging markets are not benefiting due to the predatory
neocolonial belt-and-road policies of China, and finally, their atti-
tude about the capital markets would make the founders of Enron
blush.
So, I want to say thank you to our ranking member and our
chairman for calling this hearing.
I want to start with Ms. Sutter. You have provided excellent tes-
timony. You brought a lot of good information to the committee on
the VIE structure, and also using an ADR structure, which we
have done for years and years successfully in many markets, we
have allowed liquidity for foreign companies. Tell me what you
think we ought to do that is fair-minded, and that is compliant
with WTO obligations on improving disclosure for the use of a VIE
or even the ADR structure.
Ms. SUTTER. Congressman, thank you for the question.
There has been a lot of interest around the challenges the United
States faces with China, not just in this area, but across-the-board,
and an interest in looking at greater transparency. There are a
couple of ideas that I hear discussed that may be of interest for
consideration for you and the committee: the issue of requiring a
20-F or 10-K equivalent for all firms, not just those who list, but
also those who have secondary listings; the issue of more detail on
the corporate structure; all of the beneficial owners, all of the dif-
ferent contracts and ties across the owners is another area that
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21
some have discussed; the issue of quarterly as opposed to only an-
nual reports on a company’s financial situation—
Mr. HILL. Let me interrupt you there. Do you think if that were
the status, it would make America a less effective market, say, for
American depository receipts, or would you think—not just China,
but as a general matter, would that be something that would be
met with appropriately, since companies want access to U.S. retail
investors?
Ms. SUTTER. I would say that I believe the issues I just raised
are the same for what a U.S. lister would have to do—
Mr. HILL. Right. Thank you for that.
Ms. SUTTER. Sure.
Mr. HILL. Now, let me turn to Ms. Chu. You made, again, an ex-
cellent presentation. You commented on SEC Commissioner Hester
Peirce’s speech where she was open to additional disclosure for
index providers and exchange-traded funds (ETFs). Tell me what
you think would be appropriate there?
Ms. CHU. Thank you for the question.
At present, the criteria used by index providers who, again, exert
overwhelming power over where U.S. investors are able to invest
in China, which companies have access to U.S. capital, the criteria
that they use is based on market factors. They have no consider-
ation for reputational risks like human rights or national security,
sanctions regimes, or trade conflict, and these are all things that
pertain—
Mr. HILL. Thank you. If you would, submit for me your addi-
tional thoughts on that to the record.
Mr. Chairman, I yield back to you.
Ms. CHU. Okay.
Chairman SHERMAN. The gentleman from Connecticut, Mr.
Himes, who is also the Chair of our Subcommittee on National Se-
curity, International Development and Monetary Policy, is recog-
nized for 5 minutes.
Mr. HIMES. Thank you, Mr. Chairman, and a big thank you to
our witnesses for really compelling and interesting testimony.
I want to use my 5 minutes to really zero in on the China issue
here. Look, there is a long list of things that concern us all about
China that have to do with strategy and geopolitics and military
and IP theft, and it goes on and on and on. But this is the Finan-
cial Services Committee, and I am not a priori persuaded that vari-
able capital arrangements are inherently problematic. Lots of U.S.
companies, as the chairwoman points out, use variable capital
structures. We are hearing about Luckin Coffee. I had never heard
of Luckin Coffee, but dodgy accounting leading to bankruptcy is
hardly a uniquely Chinese problem.
Let me start with you, Ms. Ross, because you did enforcement.
If I am wrong about that variable capital or particular intensity of
bankrupt companies in China, I would be interested to know, but
I am sensing that there is an allegation floating around that per-
haps the Chinese are getting special treatment in the face of the
sanction mechanisms that the markets already have. In other
words, hundreds of companies are delisted every couple of years.
The specific question is, are the Chinese somehow getting special
treatment with respect to bad behavior not leading to delisting?
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And more generally speaking, what is the narrowly Chinese issue
within capital markets, or are they more broad capital markets
issues that we should be focused on?
Ms. ROSS. Thank you for that question, Congressman Himes.
I think there is an uniquely Chinese issue here, which is that we
have investor protections in this country that require inspections of
audits of companies that are listed here. These protections are
known to have economic benefits both for our markets, our inves-
tors, and the companies that are listed here.
Almost all non-U.S. companies that are listed here are subject to
and cooperating with those protections, and the jurisdictions that
they are in are cooperating in those protections. The People’s Re-
public of China (PRC) is the sole jurisdiction in the world that is
blocking that investor protection. So in that respect, companies
from Mainland China and Hong Kong that are listed here are get-
ting a different deal than all other companies both in the U.S. and
non-U.S. jurisdictions. That is what needs to be fixed, and that is
why I commend your Holding Foreign Companies Accountable Act.
Mr. HIMES. And what is the right way to address that? There are
well-established pathways—SEC action, private rights of action,
delisting. What is the right way to address that?
Ms. ROSS. Right. You have mentioned delisting. That is the path-
way that is embodied in the Holding Foreign Companies Account-
able Act. What you have done is put forward a very straight-
forward and orderly process for managing these companies if they
don’t come into compliance within the next 3 years, and if you
enact the Accelerating Holding Foreign Companies Accountable
Act, that will be 2 years. You have given ample time for companies
and for the Chinese government to understand what the pathway
is, and we are already seeing investors in markets and even the
Chinese government taking that seriously.
Mr. HIMES. And what about the exchanges, who ultimately would
do the delisting, are they particularly hesitant to take this up with
Chinese issuers?
Ms. ROSS. In this case, it is actually the SEC that would issue
orders prohibiting trading in these companies, and that is a very
standard procedure, as you have mentioned.
Mr. HIMES. Okay. And so, again, trying to get at the uniquely
Chinese problem here, this is not an unusual action for the SEC.
Is the SEC somehow—has it been hesitant to take this action with
respect to Chinese companies, or should this committee be tight-
ening up across-the-board SEC enforcement against failure to be
sufficiently transparent?
Ms. ROSS. Great question. These are traditional tools the SEC
uses, which is why I think they are going to be very useful in this
case. What is unique about this situation is that the PRC has re-
sisted inspections of audits of all China-based companies that are
listed here. That is a unique situation. You have designed this act
to take advantage of longstanding, well-understood SEC processes
to address it.
Mr. HIMES. And just in my remaining moments, I was actually
interested to learn that, I guess, the London Stock Exchange pro-
hibits variable capital companies. Is that an idea that would have
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23
support amongst these witnesses for adoption here in the United
States?
Ms. ROSS. I do think there are risks associated with variable in-
terest enterprises. I think that they are very opaque. I do not think
that the average investor understands that when they are invest-
ing in a VIE, a listed company that is based on a VIE, they are
not investing in the operating company that is based in China.
They have no voting rights, and they have no say over what man-
agement does and no rights to information. That is very different
from most U.S.-listed companies, and I think that presents very big
risks to investors.
Mr. HIMES. Thank you. My time has expired.
Chairman SHERMAN. The gentleman from Ohio, Mr. Davidson, is
now recognized.
Mr. DAVIDSON. I thank the chairman, and I thank our witnesses.
And I appreciate your testimony, both written and oral.
And Ms. Ross, I just want to say thanks for your dialogue there
with Mr. Himes. I think you did a great job of highlighting the spe-
cific problems where China really is getting a different set of rules,
and the disclosure regime, and hopefully, how legislation passed
here could change that and apply an evenhanded set of policies
that are already in the standard toolkit for the SEC. I hope we see
some real results towards that. So, thank you for your dialogue.
I am concerned about the Office of Foreign Assets Control
(OFAC). Frankly, we have done a lot of sanctioning since 1975
when this law was applied, and I am also concerned about China
and, frankly, the conflation of market risk, which our committee
dealt with and Ms. Ross highlighted really well, with policies that
are really foreign policy, for example, the treatment of Uyghurs.
And Mr. Lorber, I in particular just want to know how effective
has OFAC been at identifying and addressing national security
risks, and is OFAC a more appropriate way to deal with China’s
human rights abuses than the Securities and Exchange Commis-
sion, for example?
Mr. LORBER. Thank you, Representative Davidson. It is a great
question.
I will say that OFAC has been particularly effective both gen-
erally, but also specifically related to human rights. After the pas-
sage by Congress of the Global Magnitsky Act and the implementa-
tion of that Act in December 2017, the Treasury Department and
OFAC have targeted a wide range of human rights abusers and of-
tentimes caused them to lose hundreds of millions of dollars in as-
sets. So, there has been a real impact that OFAC has achieved
with the use of human rights-related sanctions.
I do think that to your second question of whether or not OFAC
should be, for example, the body that goes after human rights
abusers versus something like the SEC, I do think OFAC has ex-
pertise and the Treasury Department, more generally, has exper-
tise. They have an intelligence collection function, for example, that
allows them to identify and successfully target human rights abus-
ers.
Mr. DAVIDSON. Yes, thank you. And frankly, it is a national secu-
rity problem dealt with by America’s Government with the people
with the toolkit and the intelligence to do it, and the passive ap-
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24
proach is to say, well, these publicly traded companies are going to
do it.
That is what was done on conflict minerals, for example. And at
the time, I remember one of the companies had about 30 employ-
ees, and I am filling out forms on conflict minerals when I buy
steel. A small business in Western Ohio isn’t really in a position
to assess the supply chain risk of steel mills, and so everyone just
signs off on the form. It is a very passive approach versus a very
active approach to diplomacy.
And in general, that has been kind of the challenge, hasn’t it?
With China, America has been a little too passive. We have hoped
for all of these good things from China, but in spite of the fact that
we see China’s abuse of the World Trade Organization (WTO), for
example, we haven’t forced them to honor their existing commit-
ments, and we haven’t forced them to play by a standard set of
rules.
And that is what I love about the idea that if you want to stay
listed, you have to be subject to our accounting policies just like
anybody else, and if you want normal trade relations, you have to
be compliant with human rights standards around the world. I
think it is long overdue that we apply that to China.
Now, inside China, of course China is concerned about their own
domestic market, and they have lots of attention focused on
Evergrande, for example. But we are watching a meltdown in
China that may be similar to a real estate meltdown in the United
States. They had a massive boom. They have definitely inflated
asset prices in many of their real estate markets, and Evergrande
has been at the center of that.
Ms. Sutter, I just wanted to maybe finish with you. Your testi-
mony does an excellent job of laying out the development sur-
rounding Evergrande. As you state, about 60 percent of their assets
are unbuilt and unsold properties, and the firm counts loan inter-
est payments as assets. This has empowered Evergrande to become
shockingly leveraged, and now Evergrande owns about $305 billion
in debt, 2 percent of China’s GDP.
We have already seen developments where Evergrande has failed
to repay some of its obligations. However, there hasn’t been con-
tagion effects we would expect when an entity of this size goes into
default. Why do you believe that is? Is China actually subsidizing
it directly, or do you anticipate things by the People’s Bank of
China to deal with it?
Ms. SUTTER. Congressman, thank you for your question.
I think the government is directly involved in restructuring
Evergrande. They have set up a committee, and it is very similar
to what they have done with other companies that have gotten into
financial trouble—Anbang, HNA, Fosun—and I think what they
are trying to do is discipline the company while not having con-
tagion in the broader markets, property market and broader mar-
kets. And so, I think it is a little bit of push-pull—
Mr. DAVIDSON. Thank you, and—
Chairman SHERMAN. Thank you.
Mr. DAVIDSON. —if we can follow up in writing, my time has ex-
pired, and I appreciate the chairman.
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25
Chairman SHERMAN. The gentleman from Illinois, Mr. Foster,
who is also the Chair of our Task Force on Artificial Intelligence,
is now recognized for 5 minutes.
Mr. FOSTER. Thank you, Mr. Chairman, and thank you to our
witnesses.
There are three functions of our capital markets—to allocate cap-
ital, to do so efficiently, and to control risk—and the opacity of Chi-
nese financial products puts at risk all three functions.
American capital markets are the premier venue for issuers due
to our deep liquidity and broad investor base, both of which are
substantially the products of the high information transparency es-
tablished by our regulatory regime. Essentially, here, more than
anywhere else, you know what you are buying into. We must up-
hold these standards, and there should be consequences for not
complying with transparency measures, which is why I was a
proud co-sponsor of Chairman Sherman’s Holding Foreign Compa-
nies Accountable Act, and I look forward to further bipartisan ac-
tion on this front.
Now, when we take action, one key question is whether the U.S.
should act unilaterally, bilaterally, or multilaterally. If we unilater-
ally start delisting China-based companies, per the Holding For-
eign Companies Accountable Act implementation, do we risk trig-
gering a regulatory race to the bottom where the delisted compa-
nies would just relist in London, Germany, Singapore, Hong Kong,
or even dodgier locations? Or are we better off acting multilater-
ally, very much like President Biden’s recent successful negotiation
of global minimum corporate tax rates?
And so my question is, I guess, to all of our witnesses, is there
any significant discussion of multilateral agreements on minimum
transparency standards for listed companies, and if so, what are
the venues in which these are discussed, at least among the free
democracies of the world?
Ms. Sutter, do you want to take a swing at it?
Ms. SUTTER. Sure. Thank you, Congressman, for the question.
There is competition among exchanges, and that is a consider-
ation about when one market takes moves, how companies shift po-
tentially to another. I would mention that under China’s leader, Xi
Jinping, there has been a big push for Chinese companies to come
home to list either on Hong Kong and China, either as their only
listing or as a dual listing.
One issue for consideration could be to look at U.S. standards
with like-minded, open, transparent markets that lean on the rule
of law in the sense that we do and to compare those standards—
Mr. FOSTER. My question is, what are the venues at which those
might be discussed or could be being discussed now? Are there
groups that are looking into this sort of thing?
Ms. Ross, did you want to—
Ms. ROSS. I agree with Ms. Sutter’s description of this situation,
particularly in China, that the Chinese government is actually
pulling the companies home. But to your question, Congressman,
the SEC is a very active member in the international organization
of securities regulators known as the International Organization of
Securities Commissions (IOSCO). IOSCO includes almost all major
securities regulators around the world, and has many committees
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26
that develop all kinds of model rules, model legislation, and share
information. That has proven to be a very proactive and successful
forum to raise standards across-the-board and address some of
these risks that you are talking about, for example, a race to the
bottom.
Mr. FOSTER. Yes, is China a member of this? And what would
be their reaction if we raised standards that would effectively delist
their companies in the United States? Would they insist on letting
those lower standards still apply in China?
Ms. ROSS. None of the members of IOSCO are obligated to follow
the requirements of IOSCO. IOSCO is really a body to share and
develop best practices, and the members then have—
Mr. FOSTER. They pick and choose, right?
Ms. ROSS. They pick and choose, but it is still a very good forum
to—
Mr. FOSTER. To discuss, and there would have to be a separate
new group that said, okay, we are all going to agree to common
standards to avoid this sort of regulatory race to the bottom.
Ms. ROSS. If you wanted to do that, yes.
Mr. FOSTER. Yes. Ms. Chu?
Ms. CHU. I would just like to jump in to note that the EU re-
cently enacted a regulatory framework for index providers. I think
that is the first time they have done anything of the sort, and I
would encourage the United States to consider enacting similar leg-
islation, similar regulatory policy, or to seek out commonality.
Mr. FOSTER. Mr. Lorber, any comments, sir?
Mr. LORBER. I don’t have information on whether or not there is
a multilateral body to prevent the sort of regulatory arbitrage that
you are mentioning. I will say I do think at a high level while, hon-
estly, regulatory arbitrage of this nature would be a potential issue
and a concern, there would be certain companies that I think pose
national security risks that even if they were to say we are going
to go to another exchange, we would want to prevent them from
accessing U.S. capital markets in any event.
Mr. FOSTER. Understood. I will yield back.
Chairman SHERMAN. Mr. Hollingsworth is now recognized for 5
minutes.
Mr. HOLLINGSWORTH. I am excited to be here and I appreciate
all of the testimony that has been given thus far throughout the
course of this hearing. There are a lot of issues on the table, and
in this constellation of issues before us, I wanted to break a few
things apart and better understand both the aims which we are
trying to accomplish and the means by which we might get there.
It seems in my conversations with colleagues on my side of the
aisle and colleagues across the aisle as well, that there are a couple
of different things that are being talked about.
Number one, there is deep concern that China may be appro-
priating technology from U.S. private firms, and certainly from the
U.S. Government as well, for use in its own design.
Number two, there is some concern about protecting U.S. inves-
tors from Chinese companies that may list here but, in fact, not be
engaged in the business practices that they say they are or not be
audited in the manner in which we believe they should be.
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Number three, there are some concerns that firms that might be
gaining the advantage of U.S. capital are deploying that in uneth-
ical ways—Uyghurs, for example—that probably isn’t specific to
China, but around the world, no matter where it may be and what
its geography may be, of which we would disapprove.
Number four, there is also this lingering sense that is hard for
me to shake that perhaps we are just out to deprive Chinese com-
panies of U.S. capital, period, instead of U.S. technology. And I
want to make sure that I understand all of those different aims so
that the mechanisms by which we might accomplish that truly get
us there.
Mr. Lorber, I wanted to talk about one of those specifically with
you, which is the deprivation of technological transfer from U.S.
firms to Chinese firms that we believe may be a threat to our na-
tional security, and the means we have currently in place in law
by which to stop that. Could you speak a little bit about that?
Mr. LORBER. Yes, thanks. It is a great question, Representative
Hollingsworth, and I like your sort of framing it in the bucket sys-
tem that you have approached us with.
On the first bucket, which is the concern that China may be ap-
propriating technology and what we have in place to prevent that,
I think there are a couple of different mechanisms that exist. One
is surely private causes of action. So, this may not be a U.S. Gov-
ernment approach, but there are lawsuits that can be filed.
Likewise, there are criminal causes of action, too, that the De-
partment of Justice can pursue, and part of this process during the
last Administration was undertaken with the Department of Jus-
tice’s, I believe the China Espionage Unit was the name of it, or
something akin to that.
The second primary body that you can think about when it comes
to technology theft or concerns about technology appropriation
could be in the context of the Committee on Foreign Investment in
the United States (CFIUS), and of course, this body’s revision of
CFIUS with the passage of the Foreign Investment Risk Review
Modernization Act (FIRRMA) in 2018.
Mr. HOLLINGSWORTH. Right.
Mr. LORBER. And then, there could also be potential targeted
sanctions that could be focused on particular Chinese companies if
the Administration decided to do so—
Mr. HOLLINGSWORTH. Is there a gap today that exists that we
should solve for in the prevention of that important technology
transfer?
Mr. LORBER. I think I would have to go back and take a little
bit of a deeper look at it. I think one of the concerns is that on the
private cause of action front, there are challenges. I know there
have been instances where Chinese companies that have been ac-
cused of IP theft have employed certain legal measures here in the
United States, like the Foreign Sovereign Immunities Act, as a way
to try to prevent private litigants from accessing it, and I know
there has been a major debate about that over the last few years
in the legal community.
Mr. HOLLINGSWORTH. But much of that work is ex post facto,
right? The technology transfer has already occurred, and they are
trying to recoup their losses as a private enterprise or private per-
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sons, right? Much of our work up here is the prevention of that
rather than the putting together of Humpty Dumpty.
I wanted to better understand, is there any area where we need
to do work from a legal standpoint in the prevention of techno-
logical transfer that threatens our national security?
Mr. LORBER. I take your point that it is kind of an ex-post thing,
but I think that even if it is solved for ex-post, it could have a de-
terrent impact moving forward, for example, if companies are
thinking about stealing U.S. IP and they recognize that if they do
so, there is a decent chance that not only will they get sued, but
that they will—
Mr. HOLLINGSWORTH. Yes. Well, that only counts if that suit ren-
ders a judgment, and that judgment is collected upon, which is a
real challenge—
Mr. LORBER. Yes, 100 percent.
Mr. HOLLINGSWORTH. I think what I am trying to make sure I
understand is, I don’t believe that we should solve these problems
in the financial sector, but I believe we should solve them with
very vigorous laws that prevent this and real penalties in the event
those laws are broken. Call the sheriff if someone is stealing, don’t
call the local bank to try to prevent them from depositing it in their
bank account.
With that, I will yield back.
Mr. CASTEN. [presiding]. Mr. Vargas is now recognized for 5 min-
utes.
Mr. VARGAS. Thank you very much, Mr. Chairman.
Mr. Chairman, I have to say that I think today’s hearing has
been excellent. I agree with most of the things that have been said
on both sides of the aisle. However, I also think that whenever we
talk about China, there is a great disconnect between what we say
and what we do.
For example, I fully agree with everything that Mr. Hill said
today. Mr. Hill is a good friend, and I know he has great experience
in this, and I think he is absolutely right that China has become
very aggressive, has become an authoritarian state, and they col-
lect a whole lot of data that they shouldn’t be collecting.
However, at the same time, I am from California, and I can tell
you that we have ships way out in the ocean now waiting to be un-
loaded. With all of the Chinese products coming to the United
States, we can’t seem to buy enough. It is incredible that we say
that they cheat, they do all of these things, we have a great nation
competition, yet at the same time, we don’t seem to say that, well,
we are not going to buy all their stuff.
We do, in fact, do that, whether they come here and they cheat,
or they treat Uyghurs terribly and abuse them and have horrible
human rights issues and spy on all of their people. It doesn’t mat-
ter. We still buy their stuff. I try not to. I try very hard. But at
the same time, it even drives me crazy that my iPhone is not man-
ufactured there necessarily, but it is put together there.
We say one thing, and we do another, when it comes to China.
And I think we have to understand that they are not only com-
peting with us, but they are becoming a real threat, and we have
to do more than what we are doing. That is why I think it is very
good that we are looking at them frankly, and looking at them ho-
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listically, and saying, wait a minute, first of all, okay, a lot of our
companies, as Mr. Sherman said quite well, want to be in China
because of the market there. I get that. In fact, it seems that every
time a movie goes there from the United States, they make more
money in China than they do in the United States.
So, I get that. But at the same time, we have to understand that
they are not only our competitor, but they cheat. And when they
want to access our capital markets, they don’t want to play by our
rules. We have to change the rules. We have to go after them. I
think that is a good thing. But at the same time, we don’t seem
to; we say that we will, but we don’t.
Ms. Ross, they don’t play by our rules, so what should we do?
Ms. ROSS. Thank you, Congressman, for that question. I couldn’t
agree with you more.
When the PCAOB was first formed in 2003, the PCAOB—as I
said in my testimony, the PCAOB undertook the task of reaching
out to countries around the world who had foreign private issuers
who were listed in our markets to work out arrangements so that
we could make sure that the PCAOB could implement its own re-
sponsibilities in an appropriate way, and that has worked out. It
has taken many years, but it has worked out in every single juris-
diction where we have U.S.-listed foreign private issuers based in
other countries.
The sole outlier is the PRC. Mainland China and Hong Kong
firms are not complying with our rules. We have had ample time—
many, many years—to resolve these differences, and I think that
the actions that Congress has taken with the Holding Foreign
Companies Accountable Act are critical to signaling that we have
to put a stop to that situation and enforce our rules across-the-
board with all companies. So, I think that was a very positive step
that you took.
Mr. VARGAS. Thank you. And again, I just believe we have to get
more aggressive and understand the situation that we are in now.
Certainly, it is a terrible thing that we had the Cold War, but
we understood we had a fight at the end of the day, and we won.
We are in a situation now with China where they are quite aggres-
sive all around the world, and even militarily now, when they team
up with Russia, they surround Japan militarily, they are doing
things that are very belligerent, and we have to understand that
and we have to push back.
I know that our companies want to be there, I know that they
are a big player, but at the same time, we can’t continue down this
road and think things are going to be okay. So, again, I appreciate
what everyone has said today. I think that there is a great discus-
sion going on, but I also think that there are a lot of things that
we can do together here, because I think both sides see Communist
China somewhat the same, not completely. I think there is a lot we
can do.
And again, I thank the chairman, and I thank the ranking mem-
ber. And I see that I have 7 seconds left, so I will yield back. Thank
you.
Chairman SHERMAN. I thank my fellow Southern Californian,
and I now yield 5 minutes to the gentleman from Ohio, Mr. Gon-
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30
zalez, whom, I might add, was the Republican lead on the Holding
Foreign Companies Accountable Act.
Mr. GONZALEZ OF OHIO. Thank you, Chairman Sherman, and
thank you for your leadership on that important issue. And thanks
for this hearing, and to our witnesses, I think this is a tremen-
dously important topic that, frankly, we are going to be dealing
with for a very long time.
I want to start my questions with Ms. Chu. In this sub-
committee, we often talk about how the U.S. capital markets are
the envy of the world, and I think that is accurate. And there are
a lot of reasons for that—the liquidity, the access to various dif-
ferent types of investors, et cetera. One argument we hear against
cracking down on China in a meaningful way is that companies
and investors will flee, that they will go to other jurisdictions, and
therefore, we shouldn’t do anything because we put at risk that in-
credible U.S. capital market structure.
Ms. Chu, where do you fall on that? And then, what sort of steps,
if any, do you see China taking in order to replicate the U.S. mar-
kets and to try to keep Chinese companies from listing in the
United States?
Ms. CHU. Thank you for the question.
On the first point, with regard to Chinese companies fleeing the
U.S. markets, of course, we have seen a couple of companies al-
ready leave. There are four—China’s four AI dragons who are
known for surveillance technology. I think at least three of the four
were planning to IPO in the United States as of the end of last
year, and after the entity list designations, have decided to either
go to the Shanghai STAR market or to the new Beijing exchange.
So, yes, that is a possibility, but at the same time, I believe that
enforcing capital market sanctions and restrictions on investment
is critical to U.S. foreign policy objectives. At the end of the day,
incongruent policy is ineffective policy.
When you have a company that has been identified as, for exam-
ple, building missiles in China or building hypersonic missiles, and
we decided that U.S. companies are not allowed to supply them
technology or services or knowledge, and then you are allowing the
U.S. investors to invest in those same companies so they can build
up those R&D capabilities, that is a significant flaw and a signifi-
cant gap in our ability to enforce any sort of policy goal.
Mr. GONZALEZ OF OHIO. Thank you. Just to interrupt quickly, I
couldn’t agree more. I think there is sort of a question which is,
if somebody is on the entity list, and the company is designed es-
sentially to give China a competitive advantage militarily against
the United States, should we really be that upset if they decide to
list in Shanghai? My view is, no, we should not. Thank you for
that.
Mr. Lorber, I want to switch to you. In your testimony, you men-
tioned targeted blocking sanctions against specific individuals.
What has been the overall effectiveness in these situations where
the U.S. has targeted specific people?
Mr. LORBER. Obviously, it depends on the target, but there have
been many situations in which the targeted blocking sanctions that
we have employed have been particularly impactful. In the exam-
ple I mentioned earlier, the XPCC, the way that OFAC sanctions
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31
regulations work is that essentially, if you target an entity, any-
thing that entity owns 50 percent or more is also, by law, sanc-
tioned. And in the context of the XPCC, it actually had I think
hundreds of subsidiaries spread around the world that were all
blocked, so if there was U.S. jurisdiction, you couldn’t do business
with them. So, it actually had a major impact on the entity.
Mr. GONZALEZ OF OHIO. Great. So, that’s definitely something to
consider going forward.
Ms. Chu, back to you, I want to talk about DiDi and the Chinese
government’s crackdown, ranging from their security overreach
into the company and their efforts to exert more state control. Is
this a sign of a new trend by China, and how do you see that trend
playing out vis-a-vis the capital markets?
Ms. CHU. I would respond that these are not new trends nec-
essarily. The Chinese government has always exercised its regu-
latory apparatus to crack down on social ills, crack down on compa-
nies posing threats to state control, and also to address problems
that maybe have been festering under the surface of Chinese soci-
ety for a long time and have just now come to a head, and they
are forced to take brisk and just really strong action, maybe capri-
cious action to address them.
What has happened is that U.S. investors are now exposed to
these companies, are increasingly exposed, and are, therefore, in-
creasingly exposed to these regulatory risks and crackdowns.
Mr. GONZALEZ OF OHIO. Quickly, do you think we need to do
more from a disclosure standpoint to help U.S. investors under-
stand when a DiDi or another Chinese company is compromised in
various ways as they come public in U.S. markets?
Ms. CHU. Yes, I think that is absolutely necessary, and beyond
that, I do think that disclosure requirements would serve as a de-
terrence for Chinese companies that are involved in serious human
rights abuses or national security problems. For example, in the
Hong Kong Stock Exchange, in I think 2015, China Communica-
tions Construction Company’s dredging entity sought to IPO. When
they were asked at that point if they were involved in South China
Sea militarization activities, after a period of time they postponed,
and I think they ultimately withdrew their IPO application, be-
cause in the Communist Party of China’s party-state, you can’t dis-
close, and you are not supposed to acknowledge that these are
risks.
Mr. GONZALEZ OF OHIO. Thank you, Ms. Chu. I will follow up di-
rectly, and I yield back.
Chairman SHERMAN. Thank you.
I now recognize the gentleman from Illinois, Mr. Casten, who has
received so many honors in his life, but none more important than
being Vice Chair of this very subcommittee.
Mr. CASTEN. Nothing prouder than being under your leadership,
Mr. Chairman. Thank you so much, and thanks to all of our wit-
nesses.
Ms. Sutter, I want to start with you and just pick up on some
things that you had mentioned about Evergrande. The headlines,
and I think you have said this, their $300 billion of debt, poten-
tially a default, 2 percent of China’s GDP, 2 percent of, I guess
their debt as well, national debt, real estate exposure, maybe 30
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32
percent of Chinese markets. And if I am doing the math correctly,
190 Chinese-based companies, $2.4 trillion of market cap, so maybe
10 percent of the New York Stock Exchange (NYSE) is exposed
there.
Maybe that is too much. What do you think is the systemic risk
to financial markets we should be thinking about if Evergrande
were to default on their $300 billion? Are those about the right
metrics? Are we thinking about possibly 10 percent of the U.S.
stock market exposed? Is it bigger? Is it smaller? What do you
think about the systemic risk there?
Ms. SUTTER. Thank you for the question.
I have not done the math on the stock exposure, but I think that,
to me, the important issue that it raises is kind of what it shows
about how the Chinese government gets involved when a company
is in trouble, because it shows what are the rights of investors vis-
a-vis the Chinese state when you have exposure to a Chinese com-
pany.
I think, as I mentioned earlier, right now the parameters of expo-
sure seem somewhat manageable, but there is an issue about who
gets paid, in what priority order, how are you paid. We have looked
at this in China since the failure of the Guangdong Trust, Gzitic,
in 1999, as far as just trying to preference domestic or inter-
national investors, and I think, to me, it highlights something to
watch about how the government is a direct investor in Evergrande
as much as it is a regulator of Evergrande.
Mr. CASTEN. I want to sort of put this somewhat more quali-
tative version of the question to you, Ms. Ross. In the absence of
our ability for the PCAOB to go in and audit the auditors, how con-
fident are you of our ability to answer the fundamental question,
whether for Evergrande or someone else, what is our systemic ex-
posure in the U.S. economy to situations like Ms. Sutter described,
the specific case of Evergrande, how confident are you—what are
the error bars around that in your view?
Ms. ROSS. Thank you for that question, Congressman Casten. It
is a very important question.
Our understanding of systemic risk comes largely from our ac-
cess to information so that we can analyze those risks. That is
what Ms. Chu does everyday, trying to access the information. But
when companies list in our public markets, we depend on those dis-
closures to understand the risk, and then on a whole basis of all
companies from a particular jurisdiction or in a particular industry,
we use the disclosures, investors use the disclosures, markets use
the disclosures to assess the systemic risk.
Mr. CASTEN. Yes. Okay.
Ms. ROSS. We can’t fully do that without compliance, and that is
why it is so important that we be able to enforce our accounting
and auditing rules.
Mr. CASTEN. Okay, and I am sorry to cut you off, but I want to
get to a question with enough time to answer it.
We have talked a lot about the Holding Foreign Companies Ac-
countable Act as being targeted at China, but I think it is impor-
tant for us to be clear that it doesn’t actually say China. It says
if the PCAOB can’t go in and audit the auditors for 3 years, they
have to be delisted. And of course, you are nodding, this only ap-
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33
plies right now to China, right? But in theory, if another country
decided to do that—but right now, we are just limited to that expo-
sure in China.
So, here is my question that I am building to. I want to make
sure we are not playing whack-a-mole. Let’s say that all the provi-
sions of the Holding Foreign Companies Accountable Act get imple-
mented. All of the good ideas that both sides of the aisle have run
up here are addressed. It seems to me that we still have this huge
gap because all of these rules don’t apply to get into these ques-
tions of exempt offerings. Right? Because if a company is going to
list under one of these exempt offerings, all of a sudden, all of these
other rules of SEC disclosure and what have you don’t get there.
So, how should we be thinking about—because if we address this
all for sort of conventional, old-timey offerings and China still
wants to do all of the things we are talking about doing that they
do do in these hearings, don’t they just have a back door to come
in there through these exempt offerings?
Ms. ROSS. Absolutely. I agree with your line of thinking there.
We not only have to protect our markets for public securities, but
we also have to be concerned that if the companies are delisted,
they will take advantage of our system of exempt offerings that al-
lows companies to sell securities here to specific kinds of investors
under different circumstances and not follow our normal disclosure
rules.
Mr. CASTEN. I am out of time, but maybe just for the record
afterwards, what I would like to understand is if the Holding For-
eign Companies Accountable Act only applies to China, how much
does that potential back door apply to a lot of countries beyond
China that have a way to back-door in through our exempt offering
rules?
And I would welcome a response in writing for the record. Thank
you, and I yield back.
Chairman SHERMAN. I thank the Vice Chair.
The gentleman from Texas, Mr. Taylor, is now recognized for 5
minutes.
Mr. TAYLOR. Thank you, Mr. Chairman. I appreciate the testi-
mony today.
One thing that I think we may want to get a more detailed tax-
onomy on, and Mr. Lorber, I will start with you, what did the
Trump Administration do vis-a-vis China? In terms of securities,
China sanctions, there has been some mention of the Holding For-
eign Companies Accountable Act, S. 945, which he signed into law
last year. What did the Trump Administration do?
Mr. LORBER. The Trump Administration did quite a bit on China
when it came to sanctions. In terms of securities and publicly trad-
ed securities, in November of 2020, the Administration issued Ex-
ecutive Order 13959, which essentially prohibited U.S. persons
from trading in specific publicly traded securities of identified com-
panies that were considered Communist Chinese Military Compa-
nies (CCMC), an identified list of Chinese entities that the Trump
Administration determined posed a national security threat.
In addition, there are a range of other sanctions that the Trump
Administration imposed related to Hong Kong, as I mentioned with
the XPCC related to activities in Xinjiang, and a host of other spe-
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34
cific blocking sanctions and designations. But the one specific item
which related directly to securities was that Executive Order.
And then, finally, in addition, the Administration put out a range
of guidance and advisories to warn U.S. companies of the sanctions
and illicit finance-related risks that it assessed were emanating
from China, and particularly there was, as I mentioned, a Xinjiang
supply chain advisory that they put out, among a series of others
as well.
Mr. TAYLOR. One of the bills that showed up on my desk when
I walked in here this morning was H.R. 2072, which deals with
Xinjiang and the Uyghurs. What did the Trump Administration do
on this, and which company did they target?
Mr. LORBER. They designated the XPCC in, I think again, it was
July 2020, and the XPCC is, according to the Treasury Depart-
ment, the paramilitary organization that runs many of the camps,
the forced labor institutions within Xinjiang. And so, as I men-
tioned, when they designated them, that entity had hundreds of
subsidiaries spread around the world, and so there was a major im-
pact on companies that were sourcing products from Xinjiang to re-
alize, well, we may not be able to source that product anymore be-
cause it could expose us to U.S. sanctions. And in addition to that,
they also released the supply chain advisory to make clear to com-
panies that were sourcing from that area that there were real sanc-
tions and other risks associated.
Mr. TAYLOR. Are we aware of other companies that should have
been sanctioned, that the Trump Administration perhaps missed?
Mr. LORBER. I am not personally aware of others that were not
sanctioned, that the Administration missed.
Mr. TAYLOR. Ms. Chu, do you want to—
Ms. CHU. Thank you.
The 13949, and I think 14032, the two bills that give legislative
authority to the China company sanctions program, the lists under
those, as well as the Department of Defense’s Section 1260H list,
include a total of maybe 80-something individual unique companies
that are designated as Chinese military companies. I have identi-
fied hundreds more.
That includes subsidiaries and direct parents of these companies,
many of which are directly involved in weapons programs and
high-tech surveillance, but also in just generally China’s military
modernization drive. That includes companies that are building
missiles, companies that are developing unmanned aerial vehicles
(UAVs) in the South China Sea that are directly countering U.S.
forces.
So, yes, there are significant gaps in the implementation of those
sanctions, especially because I think the text of both suggested that
they would be living, breathing documents updated regularly with
new information. But neither of those lists—the annex of the recent
Executive Order, nor the DOD Section 1260H list—have been up-
dated since they were released this past June. So, I would like to
see a consistent effort to keep those updated to include new compa-
nies and make sure that the U.S. goal of sanctioning and prohib-
iting Chinese military companies from accessing U.S. capital is en-
forced throughout.
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Mr. TAYLOR. I would appreciate getting that list and working
with you on that, making sure that we are updating that. But I
will point out that I think the Trump Administration did a good
job of going after Chinese military companies, working to try to
help the Uyghurs. The Trump Administration really deserves a lot
of credit for what they have done, and I appreciate, Mr. Chairman,
that we want to build on that success.
I yield back.
Chairman SHERMAN. Thank you. I ask unanimous consent to put
in the record a letter from Muddy Waters Capital, LLC, high-
lighting their work to research fraud involved in Chinese publicly
traded companies, including Luckin Coffee, that I mentioned ear-
lier. Without objection, it is so ordered.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Steil, for 5 minutes.
Mr. STEIL. Thank you very much, Chairman Sherman and Rank-
ing Member Huizenga, for holding today’s hearing.
The rise of China is one of the most serious economic and geo-
political challenges we face. The Chinese Communist Party has em-
barked on an aggressive campaign to expand its influence around
the world. A key part of the campaign is Made in China 2025.
Through this initiative, the CCP aims to make China the dominant
player in high-tech manufacturing.
Thinking of the important goods that power our modern econ-
omy—cars, computers, IT, aircraft, agriculture, technology, and
medical devices—China wants to dominate all of those industries.
In order to do this, Beijing is prepared to deploy subsidies, back
foreign acquisitions, and impose forced technology transfer agree-
ments. It is a direct challenge to American workers and manufac-
turers, but it is a challenge that we can overcome.
I find it interesting, though, that we are holding this hearing as
my colleagues across the aisle are considering massive tax in-
creases on American workers and on American manufacturers.
This Made in America tax will make it even harder to outcompete
China.
If we are concerned about Made in China 2025, the last thing we
should do is impose a Made in America tax. My colleagues across
the aisle are putting forward policies to destroy jobs in America,
weaken the U.S. economy, and put us at a further disadvantage to
Communist China.
Let me shift gears. Mr. Lorber, I want to reference an op-ed pub-
lished by my colleagues, Mr. Luetkemeyer and Mr. Huizenga, in
which they argued that capital controls and delistings alone won’t
change China’s behavior. They argued that we need to bring sanc-
tions into the policy toolkit specifically for dealing with China.
In your testimony, you described some of the ways our Govern-
ment has sanctioned China-based individuals and companies en-
gaged in activity that the U.S. opposes. In targeting sanctions,
could you add some color as to how we should draw the line be-
tween truly benign companies and those actually involved in activi-
ties against U.S. interests?
Mr. LORBER. Yes, it is a great question, and candidly, it can be
a challenging line to draw.
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For example, companies that don’t provide sufficient financial in-
formation or financial disclosure, frankly, may not be the best tar-
get of targeted sanctions because they are not engaged in poten-
tially, actual national security threatening activity, whereas other
companies, for example, as assessed by both the Trump and the
Biden Administrations, and as Ms. Chu was talking about, are in-
volved in the Chinese civil military fusion program and are work-
ing to bolster the Chinese military. And in that situation, I think
sanctions would be potentially a more appropriate use of the tool—
Mr. STEIL. I appreciate your point and context. Looking at the
U.S. sanctions regime in particular, to hold some of these types of
companies accountable, are there any tweaks or changes that you
would recommend in the sanctions regime under U.S. law?
Mr. LORBER. I don’t think I would recommend specific tweaks or
changes. I think the question is, are there other entities that the
U.S. Government believes pose national security threats, to Ms.
Chu’s point from earlier, that may justify targeting? I think that
would be the way I would frame it.
Mr. STEIL. Let me shift gears once again. As you are well aware,
China is the largest official creditor in the world, and although the
Chinese development finance hasn’t yet eclipsed the World Bank or
the IMF, a heavily U.S.-influenced institution, I think it does pose
a pretty significant geopolitical and economic challenge. What are
the steps that you think Congress should be taking to counter Chi-
nese influence in developmental finance?
Mr. LORBER. I apologize, but I probably need to defer on that
question and get back to you. That is not my area of expertise in
development finance, so I would want to take a look at that ques-
tion a bit more deeply.
Mr. STEIL. We will continue the discussion offline. I appreciate
you all being here today.
Mr. Chairman, thank you for holding today’s hearing. I yield
back.
Chairman SHERMAN. Thank you.
I now recognize Mr. Mooney, the gentleman from West Virginia.
Mr. MOONEY. Thank you, Mr. Chairman.
One of the great problems of today is how free-market societies
should confront the rising threat of China, a Communist authori-
tarian state with increasing power on the world stage. Our trade
deficit with China was $310 billion last year, an alarming reflection
on China’s economic power.
What makes China such a unique adversary is that, unlike the
Soviet Union, their leadership has not been as ideologically rigid.
China’s leadership has been willing to manipulate market forces to
their geopolitical advantage.
My question is for Ms. Sutter. In your testimony, you wrote
about how American investors have limited access to passive in-
vestments in China. You talk about the differences between an
American investor holding passive Chinese investments, and a Chi-
nese company and a Chinese investor holding shares directly in the
same company. Do passive investments give Americans the same
control as a typical shareholder?
Ms. SUTTER. Thank you, Congressman, for the question.
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37
I think in my remarks what I was trying to emphasize is that
China is highly restricted and closed in strategic sectors, a lot of
the areas of growth in the economy, and that they may be using
financial investment in tandem with technology licensing to get the
capital and know-how they know without having to let U.S. com-
petitors actually compete within the Chinese market.
The other point I would like to make on passive investment that
we haven’t talked about is under Made in China 2025, the govern-
ment’s use of government guidance funds, which is a private equity
model, in how the Chinese government, the Ministry of Finance ba-
sically pushes state money into the Chinese economy, which is also
used in the overseas markets, including for acquisitions and invest-
ments in other firms. I think this private equity model is some-
thing to think about as it touches the U.S. economy.
Of course, financial investment, portfolio investment is by nature
passive, but I think the concern I was trying to raise for consider-
ation is, is China using this as a substitute for allowing productive
U.S. competition on the ground in the Chinese market?
Mr. MOONEY. Okay. As a follow-up to that, in your testimony,
you wrote at length about how China seeks U.S. capital to fund its
strategic interest. So, how does that work? Can you explain that
further?
Ms. SUTTER. Yes, and this has been raised in various areas of
concern that a lot of the Chinese companies who list on U.S. ex-
changes or who are included in U.S. funds increasingly are partici-
pants in the Made in China 2025 and other Chinese industrial poli-
cies. So, U.S. capital going into these companies could be sup-
porting these programs more broadly.
And I would like to raise for consideration that because China’s
Made in China 2025 policies are codeveloped by the People’s Lib-
eration Army (PLA), by the party, and by the state, that it poses
a challenge for the United States to delineate what is truly a com-
pany that is military, what is truly a company that is of concern.
Especially as you get into dual use and strategic and emerging
technologies, I think this becomes increasingly grave potentially.
Mr. MOONEY. Thank you. Let me just say in conclusion that free-
market competition is what leads to growth and prosperity. Those
who succeed in a free market are tested by the rigors of their com-
petitors and how they serve their clients and they serve the people.
China does not believe in capitalism. China does not believe in
free markets the way we understand them in America, but China
is willing to use our financial markets against us. They are more
than willing to steal our intellectual property and tap into our
wealth in order to further their nationalistic designs.
On the surface, China is one to make it seem as though they are
merely participating in the global markets as equals, but in reality,
they are manipulating our openness for their own ends. So to un-
derstand how to best react to China’s threats, we must first come
to terms with who they are. They are a geopolitical adversary that
is always looking for a weakness to expose in order to gain an edge.
Thank you, Mr. Chairman, and I yield back.
Chairman SHERMAN. Thank you.
I now recognize the gentleman from Kentucky, Mr. Barr.
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38
Mr. BARR. Thank you, Mr. Chairman, and I appreciate the chair-
man allowing me to waive on to this subcommittee.
As a member of the National Security, International Develop-
ment and Monetary Policy Subcommittee of this Full Committee,
the Ranking Republican on the National Security Subcommittee, a
member of the House China Task Force, and a member of the Asia,
the Pacific, Central Asia, and Nonproliferation Subcommittee of the
House Foreign Affairs Committee, this topic is of acute interest to
me, and I want to thank the witnesses for the outstanding testi-
mony. It has been very, very helpful as we consider a legislative
response to the challenge of China and Western capital flows to
China.
Earlier this year, I introduced the Chinese Military and Surveil-
lance Company Sanction Act, which has received broad support
from my colleagues on both the Financial Services Committee and
the Foreign Affairs Committee. The bill seeks to address one of the
problems we are discussing here today, malign Chinese entities
using American capital to fuel efforts that directly counter U.S. na-
tional security interests.
The bill expands on President Trump’s Executive Order targeting
Chinese military companies as amended by President Biden’s Exec-
utive Order, and my bill takes it a step further. Instead of simply
banning investment in public equity issued by these companies, it
directs the President to actively sanction them.
Mr. Lorber and Ms. Chu, can you each elaborate on why a bill
like mine, which leverages the U.S. sanctions regime, is preferable
to a ban on public equity investment, as was the case with the Ex-
ecutive Orders, or enhanced disclosures such as the Holding For-
eign Companies Accountable Act?
And by the way, Mr. Chairman, I supported your bill, the Hold-
ing Foreign Companies Accountable Act, because Chinese compa-
nies are not playing by the same rules as other foreign companies,
and I support your bill to accelerate the timeline to 2 years. But
that legislation is an investor-protection bill. It is not a foreign pol-
icy or national security bill.
So, what do sanctions achieve that these disclosures do not, Mr.
Lorber?
Mr. LORBER. Thank you, Representative Barr.
The primary differences between the current Executive Orders
that are in place that you referenced, and the proposed legislation,
is the scope of the prohibition. Right now, under the current Execu-
tive Orders, the companies that are identified, U.S. persons are
prohibited from transacting in publicly traded securities, but that
is it.
By actually designating the entities that are contained on the
list, you actually prohibit U.S. persons from transacting with them
in any way. In addition, the scope of the Executive Order is limited
to the specific companies that are identified on the list, but by
blocking them by adding them to the SDN list, you would auto-
matically include any companies that those listed entities own or
control. So, the scope of it would be much, much broader.
Mr. BARR. And Ms. Chu, when you answer the question, could
you also explain the mechanics of OFAC designations? In other
words, take an index like MSCI or BlackRock’s announcement on
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39
August 30th that it would triple American investments in China,
and explain how that might change and alter the composition of
these index and these investments?
Ms. CHU. Thank you for the question.
In the past 3 years—I believe it was May 2018 when MSCI
began or announced it was going to begin including Chinese A-
shares in its indices. The exposure of U.S. investors to A-shares,
which are companies listed on the Shanghai and Shenzhen ex-
changes, has shot up exponentially. There were none at that point,
only eight shares in ADRs.
So, I believe that applying sanctions to Chinese military compa-
nies and Chinese surveillance companies in addition to existing re-
strictions on capital investment would be an ideal way to align na-
tional security objectives across sanctions programs.
Mr. BARR. If OFAC sanctioned these entities, the MSCI and the
index would presumably have to pull out those designated firms
from their index. Is that correct?
Ms. CHU. Right. I believe that the Executive Orders and the Of-
fice of Foreign Assets Control (OFAC) implementation require di-
vestment by securities or exposure to the securities. But it was un-
clear, and there are a lot of index providers and investment compa-
nies that were struggling for a long time—it just ended last year—
to figure out if they were supposed to implement this, if there were
any sort of enforcement measures. So, I believe those factors should
all be made more clear and potentially an amendment to the ways
that these capital market sanctions and restrictions can be applied.
Mr. BARR. And Mr. Lorber, can you talk about the force multi-
plier of sanctions versus U.S. securities disclosures in terms of pre-
venting a circumvention and a rerouting of capital to foreign ex-
changes?
Mr. LORBER. Yes, it is a good point. There is the usual occurrence
where the U.S. Government, for example, OFAC, sanctions some-
body. As long as there is U.S. jurisdiction, non-U.S. companies are
obliged to follow those rules and regulations. So, what you would
see is oftentimes non-U.S. persons, non-U.S. companies operating
in foreign jurisdictions wouldn’t touch those securities because they
would be blocked property, so there would be a significant exten-
sion of the impact beyond just U.S.—
Mr. BARR. It would have a multilateral impact.
Mr. LORBER. Yes.
Mr. BARR. My time has expired. But Mr. Chairman, thank you
very much, and I appreciate your leadership on the disclosures
front. We are just making the point that OFAC is another impor-
tant tool. I yield back.
Chairman SHERMAN. Thank you.
As is our tradition, I will be recognizing the ranking member,
then myself, for very brief closing comments.
The ranking member of the subcommittee, Mr. Huizenga, is now
recognized.
Mr. HUIZENGA. Thank you, Mr. Chairman, and I want to thank
the panelists for being here today. It has been very illuminating
and informative and helpful.
One special person I do want to recognize—I know Ms. Ross has
a special guest assistant with her. And sorry, it is our jobs as par-
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40
ents to embarrass our kids. I have kids about the same age, but
I’m glad you have participated, and frankly, I will note that you
had more stamina than most of the Members of Congress, making
it through a 2 hour-plus hearing.
But this is why we are doing this. This is why we are all here,
is to make sure our kids and our grandkids have a better future
than what we have, and that is why this question, this issue is so
important to what we are talking about, and that really is, I think,
the common motivator for so many of us.
I did hear a couple of common themes today. Common theme
one, China cheats. Not just China writ large—it could be the Chi-
nese Communist Party, it could be the Chinese Army, it could be
all of the business entities that are either shell or they might be
partially related, or whatever they are, but we know that China
does cheat.
Common theme two, we also know that China controls things as
much as they possibly can. And common theme three, China is out
for China. They are not out for their investors. They are not out
for their citizens. They are not out for the world economy. They are
out for China and their way of life and their governmental struc-
ture.
And I would think that if you can accept one, two, and three,
then you have to ask the question, how will additional rules, re-
quirements, demands, temper tantrums, whatever it is, how is that
going to change China’s actions? And that is what this is about,
and I don’t think those things will.
What does get China’s attention is sanctions, economic pressure,
sanctions and a strong, robust U.S. economy that can not just com-
pete but can actually outdo, can offer even better options than
what they can—not just in our country, but around the world. So,
we need a positive environment for our entrepreneurs, our small
innovators, our risk-takers, the things that have made the U.S.
such a powerful force in this world, and a force for good, by the
way.
There are more people who have been lifted out of poverty with
capitalism versus socialism or communism. There are more oppor-
tunities that have happened across-the-board for every single cit-
izen of any country that has taken that route, and we need to en-
courage that, and I just want to emphasize that as we are looking
at lots of discussions outside of this committee as well, what is
going to be getting done here in our economy. We need to be con-
scious of this.
What is separating us from other areas and other countries in
the world like China, and how are we going to maintain our edge?
And it is through creating an environment that allows others to
succeed and for us to succeed.
With that, Mr. Chairman, I do appreciate you holding this hear-
ing today, and I look forward to the conversation, and I look for-
ward to learning more about your bills that you are in the process
of drafting, and I look forward to this continuation.
Chairman SHERMAN. I look forward to working with you.
Mr. HUIZENGA. With that, I yield back.
Chairman SHERMAN. Before I took over this subcommittee, I
chaired the Subcommittee on Asia over on the House Foreign Af-
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41
fairs Committee, working with Mr. Barr. And I came to the conclu-
sion that on the big issues that affect China across-the-board—
South China Seat, belt and road, the running of a huge trade sur-
plus for them with the United States, their theft of IP, the big
things—nothing is going to change Chinese behavior except across-
the-board tariffs on their entire economy, that even sanctions on
one or two companies won’t be enough to change their overall pol-
icy. But that is outside the jurisdiction of this Subcommittee, and
the Full Committee, for that matter.
Focusing on the jurisdiction of this subcommittee, we have seen
an illustration of the power that China has through selective ac-
cess. By allowing some banks, some investment banks to have ac-
cess to China but not others, they have control over what Morgan
Stanley advises its clients and what Morgan Stanley publishes in
its index, which then makes us wonder whether those who publish
indexes should be required to register as investment advisers so
that we get that fiduciary responsibility in that process to counter-
balance the power that China would otherwise have.
I believe it was Mr. Gonzalez who pointed out that whatever we
do in our markets, American investors can always go elsewhere.
And that is true. We are a free country. You can take your life sav-
ings, sell your house, put all the money in a suitcase, go to Monaco,
and put it all on double zero.
But the purpose of this subcommittee is to protect those inves-
tors who are investing in U.S. markets, U.S. exchanges, trust funds
regulated by U.S. laws, ERISA plans and mutual funds, et cetera.
Those who do that expect to have some investor protection. Those
in Monaco, you are dependent upon the laws of that principality.
Mr. Himes points out that we have had accounting frauds in the
United States. I was here for Enron and WorldCom. That is why
we passed Sarbanes-Oxley and established the PCAOB. We needed
it. That is why we passed it. We needed it to protect American in-
vestors.
And it isn’t just China that didn’t cooperate. Belgium didn’t co-
operate either. But we passed the bill last year, and we got tough
with Belgium and, ‘‘big waffle’’ folded, and now we have the deal
with Belgium. Hopefully, we will get the same out of China as well.
The purpose of that bill and the acceleration bill is to protect in-
vestors by getting the same kinds of controls that we found we
needed after WorldCom and Enron, and that we clearly need for
Chinese companies as well.
The VIE structure means that you are not a shareholder. People
should understand that, and you are not one of the thousand big-
gest companies in the world if you are Alibaba Cayman Islands.
You don’t belong in indexes. You are not even a company. I don’t
know what you are. You are a shell that invests in another shell
that has a contractual relationship.
When you invest in a Chinese company, you may not have any
right to elect the board. Even with those who do elect the board,
the board may put the interest of the Chinese Communist Party
above those who elect them. And even if the board seeks to deploy
the assets of the company to further the interest of the share-
holders, the government is free to sanction, seize, and redirect, all
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42
without the protections of a legal system designed to protect pri-
vate property.
So, we have a lot to do to protect American investors who invest
in China, and even more to do with the overall relationship with
China.
The Chair notes that some Members may have additional ques-
tions for these witnesses, which they may wish to submit in writ-
ing. Without objection, the hearing record will remain open for 5
legislative days for Members to submit written questions to these
witnesses and to place their responses in the record. Also, without
objection, Members will have 5 legislative days to submit extra-
neous materials to the Chair for inclusion in the record.
This hearing is adjourned.
[Whereupon, at 12:23 p.m., the hearing was adjourned.]
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APPENDIX
October 26, 2021
(43)
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File and source
- File
- CHRG-117hhrg46245.pdf
- Size
- 49,452,513 bytes
- SHA-256
- 130ea781a818ec4af26f8bcc78cd5e903660f544bb0be4bcf6321d03b629cfe3
- Our copy
- CHRG-117hhrg46245.pdf
- Original
- www.govinfo.gov