House Committee on Financial Services: Better Investment Barriers: Strengthening CCP Sanctions and Exploring Alternatives to Bureaucratic Regimes
House Committee on Financial Services
Subcommittee on National Security, Illicit Finance, and International Financial Institutions
Tuesday, January 30, 2024
Topline
- Democrats applauded the Biden Administration for their work on Executive Order (EO) 14105.
- Republicans voiced concerns that creating a new regime to address China and other foreign adversaries would be costly and take too long to implement on such an urgent matter.
Witnesses
- The Honorable Thomas Feddo, Founder/Principal, The Rubicon Advisors LLC
- The Honorable Richard Ashooh, Vice President of Global Trade and Government Affairs for Lam Research Corporation
- Ms. Emily Kilcrease, Senior Fellow and Director of the Energy, Economics, and Security Program, Center for a New American Security
Opening Statements
Subcommittee Chairman Blaine Luetkemeyer (R-Mo.)
In his opening statement, Luetkemeyer said that the Financial Institutions Subcommittee has made exposing the threat posed by the Chinese Communist Party to the United States its top priority. He then noted his role on the House Select Committee on the CCP, where that is the focus of their work. Luetkemeyer said that 2023 was a pivotal year in US-China economic relations, citing Chinese Security forces raiding US consulting firms’ Chinese offices and imprison their staff, China placing sanctions on Lockheed Martin and Raytheon, banning US chip maker Micron, detaining a senior executive at Japan’s Astellas Group, and hitting Deloitte with a record fine. He continued saying that China continues to act this way, sanctioning five US firms in the month of January stemming as retaliation for US arms sales to Taiwan. Luetkemeyer emphasized that the US must ensure that these investments do not harm the security of the US and their allies.
He also acknowledged that President Biden’s EO 14105 was a step in the right direction but said that there could be improvements through legislative action, as it’s more permanent. Luetkemeyer highlighted Rep. Andy Barr (R-Ky.)’s bill, H.R.760, the Chinese Military and Surveillance Company Sanctions Act, and closed by noting how critical it is to find the right balance between protecting Americans and US allies from threats imposed by the CCP.
Subcommittee Ranking Member Joyce Beatty (D-Ohio)
In her opening statement, Beatty applauded President Biden’s actions regarding EO 14105, and said now is time for Congress, and more specifically the committee, to act to codify and strengthen this effort to address tangible national security threats to the US. She recognized that when considering legislation, members of the committee must consider the incorporation and consideration of supply chain resiliency, workers’ interest, and climate risks, all of which she said has had a significant impact the US’s economy and security. Beatty also said the committee should create legislation where existing United States investments in China should be reviewed and potentially unwound. She also highlighted the importance and need for transparency into hidden funds, such as mutual funds. Beatty closed by recognizing that while there may be varying approaches, there is a strong bipartisan, bicameral support for outbound investment screening.
Committee Chairman Patrick McHenry (R-N.C.)
In his opening statement, McHenry said members of the committee agree that they must cut off revenue to the CCP’s military industrial complex and other bad actors and said that it’s critical that Congress pursue solutions that don’t kneecap one of the US’s greatest strategic assets, capital markets. He called on committee members to build consensus on the right approach using export controls and getting the mechanics right so that regulators can implement these programs and that the private sector can abide by them. McHenry closed by reminding his colleagues to have a smart and effective approach.
Committee Ranking Member Maxine Waters (D-Calif.)
In her opening statement, Waters showed support for the legislative effort to codify and strengthen Biden’s executive order and urged her colleagues to go further by extending the screening and ensuring transparency into private equity and venture capital funds. She closed by telling committee members that they have an opportunity to ensure that none of America’s resources are used to undermine the US to support American adversaries.
Testimony
Thomas Feddo, Founder/Principal, The Rubicon Advisors LLC
In his testimony, Feddo said that he believes that an economic sanctions approach administered by Treasury’s Office of Foreign Assets Control would be the most immediate, effective, and impactful way to address outbound investment risks. He spoke to his experience, saying that he served as the first Assistant Secretary of the Treasury for Investment Security and served for seven years in senior positions at the Office of Foreign Assets Control administering enforcement of economic sanctions. Feddo explained that the dangers posed by the PRC are real and present, and that in the midst of a new tech and industrial revolution, the goal of maintaining tech superiority necessitates reinvigorating the defense-industrial base, fostering R&D, strong private sector partnerships, and carefully calibrating the deployment of US economic might and related authorities. He said that in recent years some policymakers have pushed for the creation of a new outbound regime to regulate “smart money” which is investments into high-tech Chinese startups that bring in money as well as expertise, management experience, or other intangible benefits. Feddo said that the data on investments into Chinese startups is very limited and that is among the reasons he remains skeptical of a new CFIUS like regime to screen where and how Americans invest capital. He said he also feels Congress should lead on an issue of this magnitude by legislating a policy approach. Feddo also noted the Biden Administration’s Executive Order on the matter and said that the EO is not a screening mechanism but rather a series of investment prohibitions and notifications regarding some high-tech sectors, and that some legislation being contemplated would seek to bolster that EO. He explained that all these efforts would simply amount to new bureaucracy, processes, and regulations with a new set of complications and costs. He closed by saying that sanctions are uniquely suited to address the challenges we are facing with outbound investments.
Richard Ashooh, Vice President of Global Trade and Government Affairs for Lam Research Corporation
In his testimony, Ashooh said that US technology leadership remains strong globally, and that Congress must consider the challenge as policy makers of promoting US technological innovation while regulating it in the face of potential threats. He noted the progress that has been made in shoring up those protections by Congress is the result of legislation including the Export Control Reform Act and the Foreign Investment Risk Reduction Act and that he has three recommendations drawn from the lessons of debates around those two pieces of legislation. Ashooh said that his first recommendation is to leverage existing authorities to target only legitimate security threats in a clear and specific manner rather than broadly targeting technologies that do not rise to a high level of threat. He said his second recommendation is for Congress to act multilaterally, explaining that working with key allies and partners is essential to the success of any program that the US enacts. Ashooh said his final recommendation is to address the gaps, saying that for all the work in recent years there are certainly still gaps in the framework that has allowed export-controlled technologies to be the beneficiary of US financing. He closed by emphasizing the need to use current authorities as a basis for any changes made, including by creating more specific definitions and aligning allies with multilateral controls.
Emily Kilcrease, Senior Fellow and Director of the Energy, Economics, and Security Program, Center for a New American Security
In her testimony, Kilcrease emphasized the strategic importance of American capital markets and said that her testimony would offer a set of principles that should guide the development of any future controls on US investments in China. She said that any new outbound investment controls should be tightly targeted to investment transactions that present a high national security risk arising from the transfer of non-technical industrial expertise that can fuel the indigenous development of critical technologies in China. She went on to say that controls should be clearly defined and understandable to private sector entities, non-duplicative and reinforcing of existing tools particularly export controls and scoped proportionately to effectively administer a new mechanism while avoiding unnecessary bureaucracy. Kilcrease then emphasized that any rules should be designed to enable meaningful coordination with allies as a unilateral approach to outbound investments would simply hurt US competitiveness without having any meaningful impact on Chinese tech companies. She said Congress could consider a tailored set of mandatory notifications for certain US investments made into Chinese companies that make high risk technologies, while ensuring that these notifications are subject to strict confidentiality protections. Kilcrease said that there are some investments that she feels present national security risks and should be prohibited, including investments in Chinese companies that make technologies that would be subject to the US arms embargo if originating in the United States or otherwise subject to high levels of dual use export controls. She listed semiconductors and frontier AI systems as sectors where investments could present serious risks. She also noted that an expansion of the non-SDN Chinese Military Industrial Complex program to prohibit investments of all types instead of only publicly traded securities could provide a well calibrated entity-based tool. Kilcrease said that entity-based approaches alone would not be enough as they are reactive in nature and each listing requires lengthy, in-depth analysis, but they can provide an important complement to tailored technology-based prohibitions. She closed by saying that the US should not lose sight of the need for an affirmative strategy to engage in the global economy and set the terms of trade to the US’s advantage.
Question & Answer
Introduced Legislation and Regulations
Luetkemeyer asked Feddo if he liked the sanctions included in Barr’s bill and asked if they would be effective. Feddo said he does and that most of his testimony is about the benefits of using economic sanctions to tackle the outbound investment problem because fundamentally the sanctions approach is about modifying the conduct of US persons and the experience and know-how that would come with a monetary investment.
Beatty asked Feddo on his thoughts of Rep. Gregory Meeks’ (D-N.Y.) and Rep. Michael McCaul’s (R-Texas) bill, H.R.6349, the Preventing Adversaries from Developing Critical Capabilities Act, regarding Chinese sanctions. Feddo recognized its similarities to the EO, and said his concern is that that approach is time-intensive and that it is effectively reinventing the wheel by creating a new set of restrictions, regulations, and requirements.
Rep. Andy Barr (R-Ky.) noted the three primary approaches to dealing with outbound investments being debated are his own legislation which was marked up by the House Financial Services Committee, the McCaul and Meeks bill marked up by the House Foreign Affairs Committee, and the Casey-Cornyn bill in the Senate. He then asked Feddo which piece of legislation he thinks will hit the Chinese military and intelligence companies the hardest. Feddo answered Barr’s bill because it immediately identifies the entities of concern which are on various lists with various levels of restrictions making them blocked persons, which under a sanctions regime would block any deals with that person.
Barr commended the efforts and good intentions of his colleagues’ legislation and then asked Feddo if he agrees with criticism that his bill is forward-looking as opposed to backward-looking. Feddo said that the US has already identified entities that are involved with civil-military fusion and that the US should tackle those entities right away. He continued saying that the tech industry is so fast moving that even a sector approach would be chasing its tail to some extent and reactive as well. Barr followed up asking if the sector-based approaches have the same multilateral effect that his sanctions approach has. Feddo said he does not believe so because blocking is the most powerful type of sanction we have and that even with a more tailored prohibition the US financial system becomes off limits for those dealing with named entities.
Rep. Roger Williams (R-Texas) stated that in recent years, there have been increased regulations on American businesses, which is allowing US adversaries to gain competitive advantages, such as restricting access to capital through the Basel III endgame proposal.
Williams asked Ashooh to expand on the need for pro-US policy and how increased regulations can hurt US competitiveness on the world stage and open the door for China to establish global dominance. Ashooh said the US can’t “out-China” China and noted that the magic of the US system is that it inspires innovation and then turn that into business success. He emphasized the need to work with allies.
Rep. Bill Foster (D-Ill.) asked Kilcrease what the Biden Administration could work better with allies on supply chain safety and resilience. Kilcrease said progress can be made on identifying areas of strategic technologies of shared concern with key US allies and then make sure we have our domestic authorities aligned and cooperation mechanisms to work with allies.
Rep. Zach Nunn (R-Iowa) asked Kilcrease what the benefits are of an entity-based list. Kilcrease said she thinks where the government has knowledge that there are particular entities acting against US national security interests, they should list them.
Outbound Investment Regimes and Sanctions Approach
Luetkemeyer said that he believes Congressman Barr’s bill that deals with outbound investments is probably the best answer to dealing with US capital flow to China. He then noted that Feddo said in his testimony that the US needs to work with its allies to make sanctions effective and asked how that can happen, if it is happening, and if the US has a plan. Feddo said he does not know if it’s happening or if we have a plan, but that any of the economic state craft tools available to Treasury are more effective with a multilateral approach and noted that Treasury encouraged other nations to create more inbound investment screening processes when it was implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).
Beatty asked what the primary concerns must be addressed in a screening regime, and what are the most effective ways to address them. Kilcrease said there is a strong need to increase transparency, and that it would be beneficial to have visibility into the types of investments that are being made and the types of rights that come with those investments and how those particular investments may be supporting China’s indigenous critical technology development that is contrary to US national security interests. Kilcrease also said there are benefits to the entity-based approaches and to technology-based restrictions that could be used to reinforce any outbound investment regime.
Barr asked Ashooh if a sector-based approach places the enforcement responsibility on the private sector or the government. Ashooh said he is unsure and that that is the primary problem with a sector-based approach and noted his agreement with Barr’s approach.
Rep. Dan Meuser (R-Pa.) asked Feddo to elaborate on why setting up a new outbound investment regime would create more bureaucracy than using the tools of the Office of Foreign Asset Control. Feddo said that creating another regulatory regime instead of relying on existing and proven tools will come with a huge cost and take a significant amount of time, and that Representative Barr’s bill attacks this problem quickly and effectively by leveraging resources Treasury already has.
Rep. Wiley Nickel (D-N.C.) asked what condition the US government is currently in to effectively understand, monitor, or control outbound investment activities. Kilcrease said there’s concern about transparency around outbound investment activities, but that there is a common theme of how difficult precise information is to obtain, and that there’s certainly a need for increased transparency.
Nickel asked what the best approach is for defining which activities or sectors should be subject to notification, review, restrictions, or waivers. Kilcrease said she comes back to leveraging the existing list that the US has in the export control system. She continued saying that the US has already defined risky technology sectors and so the US should use those as a base to work from.
Rep. Young Kim (R-Calif.) asked Feddo if allies and partners would be more willing to work with the US to screen investments or to impose targeted sanctions. Feddo recalled that the European Commission recently released a white paper on whether it’s going to create outbound investment control similar to the US, and it essentially said they will be taking two years to collect data and decide if they want to even partake. He noted that this was an indicator that our allies are still working out details on what an outbound investment regime would look like and explained that sanctions implemented in a multilateral way are a familiar tool to many of our allies.
Rep. Jim Himes (D-Conn.) asked all panelists if they would rather have a scenario where US investors give capital to a Chinese quantum computing firm, get four weeks of due diligence, a board seat, and other vital information or allow a shady Belarusian angel investor to provide the capital. All panelists said they would pick the US investor scenario.
Rep. Gregory Meeks (D-N.Y.) asked Kilcrease what would help delineate between the different legislative approaches to address the outbound issue, and what are some of the critical problems an outbound regime could tackle that cannot be addressed through existing CFIUS sanctions and export control regimes. Kilcrease said the US can leverage existing tools to a good extent tackle this issue, but noted that there is a gap and that current proposals being debated are not mutually exclusive and have synergies that could be used to be effective.
Meeks then asked Kilcrease what the benefits are of utilizing a sector-based approach instead of having a case-by-case review. Kilcrease said the benefit of a technology/sector-based approach is that it aligns with where the US government is headed on export controls. She added that there’s a lot of logic in applying a country-wide baseline test using clear technical specification in a sector-based approach.
Investors and Foreign Adversaries
Luetkemeyer noted recent weaknesses reported in the Chinese economy and then asked how dangerous China would be if we weakened them, specifically asking if they would begin to act more aggressively or if they could become more predictive. Ashooh said that that is the risk that should be contemplated in whatever we choose to do, and that an ideal outcome would be a China that becomes even more dependent on the US, economically and technologically.
Barr asked why a recent Goldman Sachs report showed that investors were reducing their exposure to Chinese bonds and equities over the past three years after massive investment in the 2000s. Ashooh said there are a variety of reasons and cited Hong Kong as one example where China’s influence over the city grew and we had to drastically change how we treated Hong Kong as an entity and that the risks associated with investing in Hong Kong are the same risks present in mainland China.
Rep. Vicente Gonzalez (D-Texas) asked Kilcrease if legislation on these issues should contemplate preventing non-linear US investments going to factories, such as a semiconductor factory in Mexico that is owned by Chinese entities. Kilcrease said Congress should always look at evasion routes and circumvention and that the US needs to be working with its partners, like Mexico, to make sure that the US is encouraging them to put in place their own protections for their own investors and domestic manufacturing capabilities as well.
Gonzalez then asked about the risks associated with opaque and often untraceable capital in private funds, and how Congress should address the issue. Kilcrease said in the context of historical sanctions programs, there likely will be massive amounts of evasion attempts and that the US should anticipate that dark pools of money where there isn’t visibility and transparency are a high national security concern. She said that Congress should look at ways to increase transparency.
Rep. Barry Loudermilk (R-Ga.) asked if Americans are allowed to serve on the boards of Chinese companies and if there are laws and regulations around that in China. Ashooh said that there are restrictions in place and that the Chinese are very mindful of the role Americans play in the Chinese business community. Loudermilk asked if having American executives serving on foreign boards has a strategic benefit for the US. Ashooh said it does, citing one point he made earlier about increasing China’s dependency on the US and noted it’s always beneficial for the US to have people in positions of superiority.
Nickel asked Kilcrease, considering China’s military-civil fusion policy, to explain how the Chinese government might use this strategy to encourage foreign investments into China, specifically to facilitate technology and capital transfer to Chinese firms. Kilcrease said through the Administration’s policy, she’s seen that we are moving towards a country-wide approach where the US is setting clear technical parameters for what sorts of technology are most relevant to national security. She emphasized the need to leverage the clear definitions in the export control context.
Foster asked whether foreign investors are going to be treated fairly in the liquidation of Chinese property developer Evergrande. Ashooh said he would be worried about that, and Feddo said he isn’t aware of any indication that investors will be treated fairly.
Rep. Monica De La Cruz (R-Texas) asked how the Chinese military industrial complex has relied on US technology and expertise to boost their own industry. Ashooh said the challenge currently being faced is not just about the technology in the form of commodities or information, it’s also in the form of dollars, and emphasized that this is why the US needs to evolve and deal with these threats as they emerge. Feddo agreed and noted that the US government needs to have a whole-of-government approach, like China, to effectively respond to these issues.
Rep. Brad Sherman (D-Calif.) noted that the lower capital gains tax rate encourages Americans to buy stocks, but that investors receive that benefit regardless of what stocks they buy, including Chinese stocks. He then asked if any of the witnesses could think of a reason why the US should provide enormous tax incentives for people to invest in Chinese companies. All witnesses said they could not.
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