Congressman Brad Sherman, a Democrat from California, and Congresswoman Victoria Spartz, a Republican from Indiana, have proposed four bills aimed at addressing the risks associated with American investment in China. Each bill targets distinct threats that China poses to America's free capital markets.
The first bill, titled the No Capital Gains Allowance for American Adversaries Act, seeks to eliminate the capital gains tax break for investments based in China, Russia, Belarus, Iran, and North Korea. If enacted, the Securities and Exchange Commission (SEC) would mandate disclosure on each investment opportunity that no tax breaks will be granted in the event of an investment.
The second piece of legislation is the No China in Index Funds Act. This law would prevent index mutual funds from investing a majority of their assets into Chinese companies as a means to reduce management expenses. The goal is to keep Chinese firms lacking comprehensive risk data out of index mutual funds and protect American investors from highly volatile investments.
Sherman and Spartz also believe that businesses with operations dependent on China and related geopolitical risks should be obligated to report their arrangements through the SEC. To this end, they have introduced the China Risk Reporting Act which would require publicly traded companies to discuss their dependence on China during their annual reports and outline what steps they have taken to mitigate such risks amid escalating tensions between China and America.
According to a press release by Sherman on his website, 144 Chinese companies are involved in practices that violate human rights. While it is currently illegal to purchase products from these companies, purchasing their stock remains legal. The PRC Military and Human Rights Capital Market Sanctions Act aims to rectify this by prohibiting Americans from investing in stocks of companies included on sanction lists.
In expressing his satisfaction with these legislative efforts, Sherman stated: "I’m very pleased to work with my fellow co-chair of the CPA caucus on a rational set of rules for American investment in corporations based in China. We provide the capital gains tax subsidy to encourage Americans to invest and build our economy. It makes no sense to forgo U.S. tax dollars to encourage Americans to invest in China’s economy. It’s also unfair, because China provides tax incentives to Chinese investors but not to those who invest in American stocks. The package of bills also requires American public companies to describe their China risk, and steps they are taking to reduce it. Another bill prohibits buying stocks of companies that are such an anathema that we already prohibit buying their products. Finally, we keep Chinese stocks out of index funds, because those funds do no research into the risks these companies pose."
