How does the CCP or bad actors in China compromise our markets?
FBI Director Wray testified before the China Select Committee and said there are Chinese state-sponsored actors who are lying-in-wait to attack our critical infrastructure. A warning by the FBI director about the CCP's intentions to interfere with our critical infrastructure should be taken very seriously.
There's a bill in Congress right now to stop a nationwide database that was created by the SEC to collect all of the personal and financial information of every American investor. We've told them this is a sitting duck for hackers from China, Russia, and other places. This database could be weaponized against you by our own government, let alone CCP hackers who obtain the information and try to use it to blackmail American citizens.
How does our financial system help China?
Does it make sense for American investors to be sending their money to an adversarial nation that made it very clear they want to undermine our position as the leading international economic and global superpower? They want to undermine our position in the financial markets, and they will do anything to steal the technology that we have, militarily and otherwise, in order to support their rise.
Where are they getting the funds to be able to challenge the United States? The answer is, Wall Street facilitated U.S. investor dollars. In some cases it's sent directly to the Chinese Communist Party (CCP) when they issue bonds and Wall Street institutional investors buy them, or they're part of the Bloomberg Barclays global aggregate bond index, which includes almost 40% Chinese bonds.
That money goes directly to the CCP, which two Administrations have said is committing genocide against its own people.
What other instruments are used to transfer wealth to China?
There's a cozy relationship that was built with Wall Street because they want fees, and China wants access to our capital markets.
They started with direct listings on Wall Street stock exchanges. Those companies are brought into our marketplace, there's an IPO and listing fee, and then they're sold to institutional investors. These products infiltrate portfolios of people who might not know that they own this, particularly through pension funds, endowments, and others.
The second layer is index funds. That includes mainland Chinese companies that are listed on mainland Chinese stock exchanges—what I call the “passive index loophole” to have access to our marketplace through mutual funds and ETFs. They send money directly to military companies, companies that are human rights abusers, and companies that make weapons that support the military industrial complex in China.
How does China exploit these loopholes?
If you invest in a company on a U.S. stock exchange, you are buying shares in the U.S. company and you have a controlling interest in what that company does. That's not how it works with China.
With China, Wall Street lawyers created a very specific and complicated scheme called “variable interest entities.” What that means is that these are Cayman Island-based companies that have contracted with a mainland Chinese company. Then they sell you a share in the shell company which owns the contract associated with the mainland Chinese company.
If there is fraud you have no recourse, shareholder rights, or voting. This is really a scam that was perpetrated by Wall Street lawyers and was allowed to happen by our SEC.
What actions should be taken?
One, when Wall Street comes in and starts lobbying Congress and the White House on Chinese issues, they should be forced to register as lobbyists under the FARA Act.
Two, we need to have a legitimate outbound investment prohibition on multiple sectors in our economy so that the money does not flow into the Chinese military civil freedom complex. There are nuclear companies, fusion companies, quantum technology companies, and they're all on the sanctions list, yet they are held in multiple funds and ETFs that are offered to the American investor.
So sanctions alone do not work, which is why we have been pushing a prohibition on investment in shares of mainland Chinese companies listed on mainland Chinese exchanges which have no regulation comparable to America’s.
There is about $200 billion that flows from the U.S. to China related to those funds. That prohibition will not severely impact or disrupt the market in any way, and to the extent that people are concerned about $100 billion or $200 billion being cut off from the Chinese Communist Party, ask yourself what that could do for the American economy and for the American small businesses that are looking to expand their job markets and workforces.
How should venture capital investments in China be regulated?
We have people in Congress who say we should allow venture capital to invest in Chinese technology companies so that we know what they're doing, what steps they're engaged in, and how far advanced their technology is.
China has a national security law that every company that does business in China must comply with. Some foolishly think that VCs from America are going to be able to invest in Chinese companies, then come back and tell the CIA, State Department, or Treasury Department what's going on in terms of quantum computing and other technologies related to AI and the military complex. It's just not going to happen. They will cut off the investment of that VC and that money will go to zero.
What other impacts result from cross-investments between the U.S. and China?
The Chinese stock market and economy have been suffering badly over the last 15 months, and that's because they built ghost cities all over for the past 10 years. That can have a negative feedback loop into our country, because we will import the cancer of the commercial real estate problem from China into our country via Wall Street.
Then you look at what they're trying to do with their quantum computing and AI technology. It begs the question as to why are we allowing them to have access to anything that comes out of the United States at the level they could use to perform military capabilities that could harm or threaten Taiwan, Palau, or any of the islands in that area, because that's part of their ambition.
Chris Iacovella is the President and CEO of The American Securities Association (ASA). He served as special counsel and policy advisor at the US Commodity Futures Trading Commission (CFTC).
