The Scene
Rep. Mike Gallagher, the chair of the U.S. House committee on competition with China, said he might widen the panel’s investigation into Wall Street’s ties to China’s military sector and its human-rights abuses, which has so far focused on BlackRock and index provider MSCI.
His comments to Semafor on Tuesday came after two days of mostly private meetings in New York with Wall Street executives wary of drastic limits on U.S. investments in China. The visit included a tabletop exercise on the financial impacts of a Chinese invasion of Taiwan and a hearing on risks of investing in China.
“I don’t know if we changed anybody’s mind,” said Gallagher, whose committee has put one industry after another under scrutiny from fast fashion to semiconductors to finance. “But I think those we met with left with a sense that this is an issue they can’t ignore.”
Josh Wolfe of Lux Capital, a venture firm that invests in defense technology and scientific endeavors, organized closed-door sessions meant to help lawmakers and financiers understand each other’s interests “without being knee jerk or reflexive,” he told Semafor.
Few attendees supported a complete decoupling from China, said Wolfe, who cautioned against economic jingoism. “Using a hammer or a bludgeon would be a terrible idea,” he said.
The panel is collecting ideas for an end-of-year report that members hope will include bipartisan recommendations for curtailing the flow of U.S. money into China.
Rep. Raja Krishnamoorthi, D-Ill., the committee’s top Democrat, told Semafor that he heard one participant remark that “if we don’t invest in these companies, somebody else will.”
One idea making the rounds — and explicitly proposed this morning by former SEC Chair Jay Clayton — is requiring U.S. companies to disclose how much, and what kind of, business they’re doing in China. He says companies should also share what are essentially their commercial war games, explaining publicly what happens to their business if tensions between the U.S. and China boiled over.
Reed Albergotti contributed to this report
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Liz’s view
I was struck by something Gallagher said. “A lot of people here still cling to the theory that financial interdependence is a stabilizing mechanism,” he told Politico of his visit.
The people running Wall Street today grew up in a liberalizing, globalizing world that made them rich. Free trade was good for business — currency swaps, cross-border M&A, letters of credit for boatloads of Hondas bound for the U.S. — so firms grew to meet that demand. The result is that there’s too much financial capacity for a world that’s smaller and more fragmented, so there’s a lot of self-interest baked into the resistance Gallagher’s getting.
I’ve written about this before in the context of carbon emissions, but I think single-issue disclosures are sort of silly. (Actually, so does Clayton, generally.) Last year more than 1,000 companies spent time and shareholder money certifying that, to the extent they use rare minerals, they don’t enrich any African warlords in the process — a worthy aim, but of zero importance to investors and a weird thing for securities regulators to be enforcing.
But the pandemic and the war in Ukraine proved that global footprints are material. The SEC said as much, issuing strongly worded guidance on how to discuss COVID-19 risks and offering companies a handy disclosure checklist for Russian exposure.
Both of those events made companies pay more attention to their global sprawl, in the same way that 2008 spurred big financial firms to build systems to track company-wide exposures to thousands of different markets and scenarios. It now seems insane that there was ever a bank that couldn’t, but before 2008, most had a fuzzy idea at best of their books at any given moment. So forcing companies to confront these issues is good public policy.
But the unstated, hoped-for outcome here is that by measuring exposure to China, we can penalize it and ultimately shrink it. Using SEC disclosures to dictate behavior has the same problems as policy-by-tax-code: It’s messy, usually outlives its usefulness, and makes the end product virtually unintelligible.
“If Congress doesn’t want U.S. investors investing in China, they should legislate it,” Clayton told me. “You can’t expect investors to navigate the shades of gray around foreign policy and national security.”
The View From Beijing
“There’s a Chinese saying: ‘We will not make provocations, but we will not flinch from provocations,’” Xie Feng, China’s new ambassador to the U.S., told Semafor’s Steve Clemons at the Aspen Security Forum in July.
He promised unspecified retaliatory actions if the U.S. put bans on technology and investment dollars, as the White House did a few weeks later. “The Chinese government cannot simply sit idly by,” he said.
An extreme scenario in which U.S.-China trade is cut off, the lack of critical supplies would cost the U.S. 1.3% of its GDP, according to Allianz, the giant asset manager, who said U.S. reliance on China for critical goods has doubled since 2018.