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Anyone who hasn’t yet read the US-China Economic and Security Review Commission’s 2021 report
to Congress released last week, pick it up immediately. It’s hard to
describe any 500-plus page report to legislators as punchy, but this one
is. As I write in my latest column,
it ushers in what very well may be a new era of US-China decoupling,
with all sorts of new recommendations for limits on capital flows
between the two nations. The commission isn’t a lawmaking body, but it
has a very good record for pushing forward recommendations that do
become law or administration policy, from limits on US business with
Huawei, to rules around the insourcing of crucial pharmaceutical
ingredients.
The
commissioners are chosen by both Republican and Democratic leaders, and
there was unusual consensus around this year’s report, which lays out
the ways in which the Chinese Communist party (CCP) is building up
global economic, political and military power to push forward a “new
model for human advancement”. The party is doing so with plenty of help
from Wall Street, as FT readers will know. The question is, how long
will this divide last? Is it possible to have American financial
institutions indefinitely funnelling capital in and out of a country
that supports forced labour; has low environmental, social and
governance standards; and is the US’s chief strategic adversary?
I
think the answer is no, but I must say I’m gob smacked that the
hypocrisy of American banks and asset managers pouring money into
companies that might endanger US security isn’t getting more attention.
It’s an issue raised by two of the commissioners, Jeffrey Fiedler and
Michael R Wessel, in their additional comments towards the end of the
report. While it’s not technically illegal for companies like BlackRock,
Goldman Sachs, Charles Schwab and many others to invest in a firm such
as AVIC Shenyang Aircraft Company, a primary producer of Chinese fighter
jets, it’s hard to argue that it’s right, particularly in the current
moment. As the commissioners put it:
“One might be excused for thinking that a basic responsibility of
American citizenship ought to be not to do anything to endanger US
troops.”
The
current Biden executive order prohibits investment in only 24 publicly
traded Chinese companies. But the report also states that about
two-thirds of non-state companies in China today have CCP officials
involved in their business decisions. That means that most US companies
doing business with such firms are being influenced in some way, even if
it’s in a small way, by the party as well. The commissioners speculate
that the lax regulation of capital flows at the moment may be down to
increased Treasury Department sway and waning US Department of Defense
impact in such matters. But I wonder if that will last as Americans
become more aware of how deep Wall Street is entrenched in China.
As Fiedler and Wessel put it on page 504:
“In plain language, US investment banks and institutional investors can
still buy, sell and profit off of Chinese military related companies as
long as they are not doing so in the United States and only involve
non-US citizens. If we are really interested in protecting US national
security rather than simply appearing to, this loophole should be
closed, as the commission recommends.” |