Top GOP voice on China threat says investment restrictions fall short

WASHINGTON — The leading House Republican voice on the national security threat posed by China says the White House’s plan to limit overseas investment in Chinese military and defense companies struggles to address the real problem.

President Joe Biden’s executive order, expected to be implemented next year, “takes an important step in the right direction,” but it should have considered public market investments in Chinese firms that cooperate with the Chinese military or are complicit in human rights abuses. Rep. Mike Gallagher said Friday on CNBC’s “Squawk Box.”

The order would also require US-bound investors to notify the Treasury Department of transactions involving certain technologies that could pose a threat to the US.

The Wisconsin Republican is chairman of the House Select Committee on the Chinese Communist Party and a leading voice in the House on the risks of US investment in China.

Americans who invest in company stocks, mutual funds, ETFs, and bonds in the public market risk inadvertently contributing to technology that poses a potential national security threat when they trust US financial firms that invest in companies blacklisted for supporting the CCP.

The CCP Committee of the House of Representatives has identified and effectively blacklisted nearly 50 firms, including machinery, aircraft and technology firms.

Gallagher argued that investment restrictions could be used as a weapon to weaken China’s economic power and military capabilities by cutting funding for both defense and national security.

“The CCP is an adversary, and you don’t defeat an adversary or deter an adversary by shoveling billions of dollars into their military and technology program,” he said.

He also argued that investments such as American pension plans should not depend on companies’ earnings, which could threaten the long-term security of the plans’ investors.

“We have to ask ourselves if we want the pension fund, the overall retirement health of millions of Americans, to depend on the success of investing in things like (Chinese) aircraft carriers, artillery shells and fighter jets.”

China is now the US’s third-largest trading partner behind Mexico and Canada, putting the White House in the difficult position of trying to limit specific US investment while keeping the overall bilateral trade relationship stable.

Gallagher’s comments came as the Chinese government announced on Thursday that it was considering countermeasures to Biden’s order.

Last month, the House CCP Committee sent inquiries to US-based global investment firms MSCI and BlackRock seeks more information on how firms can direct US investment to Chinese companies on the committee’s blacklist.

“We don’t think Blackrock or MSCI should be directing American dollars to certain companies like this, and we need to close the loopholes and at least make sure Americans are not knowingly or unknowingly funding the Chinese Communist Party,” Gallagher said Friday.

MSCI provides investment information and analytics to help clients make investment decisions in a variety of global markets. In a statement to CNBC, the company said it was “engaging constructively with the House Select Committee” and “complying with all applicable U.S. laws.”

BlackRock, the world’s largest asset manager, has previously said it offers clients options to avoid investing in certain Chinese sectors. The company told CNBC on Friday that it complies with applicable laws and that “the majority of our clients’ investments in China are through index funds.”

According to Gallagher, the executive order gives Treasury Secretary Janet Yellen broad authority to determine what constitutes a covered investment — too much authority.

Disputes over how broadly the restrictions should be applied pit the White House against China skeptics on Capitol Hill, a significant group of both Republicans and Democrats.

Yellen has already signaled that she intends to “narrowly target” any investment restrictions to protect US national security, insisting that it is not intended to weaken China’s economy.

“While these policies may have economic implications, they are directly driven by national security considerations,” he said in a speech in April.

The Treasury is accepting public comment on the proposed rules in the executive order until September 28. But so far, no official timeline has been given for issuing final rules on foreign investment restrictions.

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