Yesterday, in New York City, Members of the House Select Committee on the Chinese Communist Party asked witnesses on how to craft restrictions to decrease U.S. investment in China. Witnesses included former Securities & Exchange Commission (SEC) Chairman Jay Clayton.

Lawmakers and witnesses proposed weighing curbs on sanctioned companies, transparency measures for businesses with substantial exposure to China, and new restrictions on variable interest entities (VIEs).

According to Committee Chairman Mike Gallagher (R-WI): “It is up to Congress to ensure American money isn’t financing the CCP’s top tech ambitions, including AI, quantum computing, and semiconductors, but also biotechnologies, directed energy, hypersonics, advanced manufacturing, space technologies, and anything associated with the…military-industrial complex.”

Chairman Gallagher expressed his fear as to what he terms the “all-too-plausible” possibility that China invades Taiwan using weapons technology developed through American investment: “They may be using [artificial intelligence (AI)] targeting systems that Silicon Valley helped them build…In short, we are financing our own destruction.”

For his part, Ranking Member Raja Krishnamoorthi (D-IL) argued that government retirement plans should be precluded from investing in companies that build Chinese military items. According to Krishnamoorthi, the Federal Thrift Savings Plan allows access to index funds that invest in subsidiaries of AVIC, which manufactures China’s J20 stealth fighter jet; AVIC is currently subject to U.S. sanctions.

“I find it unacceptable that we maintain lists of sanctioned Chinese companies, but allow investment in them. I think it’s wrong.”

Krishnamoorthi also advocated to restrict investment in companies using forced labor, companies that some contend could include U.S. company Apple, among other domestic companies.

Gallagher lauded President Biden’s August Executive Order "Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern" which seeks to create an outbound investment review mechanism but characterized it as “a first step to address the problem, but it must not be the last.” That order was coupled with a Treasury Department Advanced Notice of Proposed Rulemaking (ANPRM) soliciting comment. Comments are due by September 28th. Many critics have decried the proposed outbound investment notification rules as too weak. Treasury itself noted that “…this ANPRM does not necessarily identify the full scope of potential approaches the Treasury Department might ultimately undertake in regulations to implement the Order.”

Clayton urged the U.S. government to provide investors with clear proverbial rules of the road: “Investors are not good at, they don’t have the information to be good at human rights, national security, trade policy. Those are matters for the government.…Given clear and coherent direction from government, the power of the market to respond to policy is remarkable.”

Clayton suggested that Congress create a pilot program requiring companies with substantial risk exposure in China to disclose their risk scenario planning. “…I would at least consider a pilot program for very large companies disclosing the China-specific risks and what type of scenario planning they have done in the event of an abrupt decoupling.” Clayton suggested that companies with market capitalization risk of $50 billion or more or annual revenues from China of $10 billion or more be subject to such a program.

Rep. Seth Moulton (D-MA) asked whether Congress should ban variable interest entities (VIEs). One witness suggested implementing greater oversight gradually such as the approach taken to delisting Chinese companies for accounting violations under The Holding Foreign Companies Accountable Act signed into law in 2020.

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