If the Republicans and Democrats can agree on one thing, it is that China is America’s biggest long-term strategic threat. However, the optimism of American financial companies towards China couldn’t be better. Banks such as Citigroup, Goldman Sachs and JPMorgan Chase are expanding there, as are asset management companies such as BlackRock. But what happens when Wall Street’s desire to get rich in China meets the political realities of American Street?

The annual report of the US-China Economic and Security Review Commission released to Congress last week has put this issue at the top and center. The report recommends a series of new restrictions on commerce between the two countries, not just commodities and Labor and capital flows.

The members of the committee are appointed by minority and majority leaders in Congress and have a good track record of predicting legislative and regulatory trends. It was the first to list Huawei as a problem (2004). As early as 2010, it emphasized the risks in key supply chains in the pharmaceutical and other fields, and put the issue of forced labor in Xinjiang on the political map.

As stated in the recent report, the Communist Party of China not only uses economic coercion and strengthened state control to advance its own political model, “Chinese policymakers are competing for foreign capital and fund managers as they strive to make China’s capital market a technology for the CCP. Tools for funding development goals and other policy goals.”

The 32 new recommendations made in response to this issue include: restricting investment in variable interest entities (VIEs) related to Chinese entities; authorizing the US Securities and Exchange Commission to require companies to disclose whether they use Forced labor in Xinjiang Or on the US Department of Commerce’s entity list or the Treasury Department’s list of military industrial enterprises; and compulsory US listed companies to report whether there is a Chinese Communist Party committee in their business. There are also suggestions on restricting the use of cloud computing and data service businesses owned by Chinese companies.

If these rules become law, the potential market impact is countless. Only consider the idea of ??compulsory “US listed companies with facilities in China” to report annually “whether there are Chinese Communist Party committees in their operations and summarize the actions and company decisions that these committees may participate in”. This seems to be an extreme move, but in recent years, the overlap between China’s non-state-owned enterprises and the Communist Party has increased significantly.

The report cited data used by the Organization Department of the Communist Party of China (also cited by Western scholars) and pointed out that “in 1998, only 0.9% of non-state-owned enterprises had a CCP committee, and by 2008 this figure rose to 16%.. By 2013, the committee The presence of non-state-owned enterprises has expanded to 58%, reaching 73% in 2017, accounting for 1.9 million companies. Assuming these figures are accurate, it is hard to imagine that a Western company or financial institution doing business in China will not have potential The problem. It’s also hard to imagine that Western financial institutions that claim to prioritize ESG issues will not be under increasing pressure to justify the hypocrisy of cooperating with authoritarian governments.

On the other hand, the committee also recommends protecting the assets of American investors in China.In particular, the report flag VIE, used by Chinese companies to circumvent regulations that prohibit them from owning foreign investors. Such instruments include the largest proportion of Chinese bonds based on the value of sales on US exchanges.But they are opaque; regulators like the US Securities and Exchange Commission have Raise concerns Regarding the risks they bring to investors, they usually cannot obtain the same amount of information as a typical listed company, and under no circumstances do they have any management control.

If it becomes a reality, the combination of regulation of VIEs, index providers that have a huge impact on capital flows into China, and the treatment of Sino-US capital flows as ESG issues may affect the market. In fact, I bet that capital will be the next frontier in the decoupling of the U.S. and China economies.

Some will argue that this will increase geopolitical friction and harm the global economy. This may be true. But even though Wall Street wants to tap into the largest group of new international investors, and Beijing needs funds to solve the country’s debt problems, it’s hard not to think that the influx of financial companies into China reflects the paradigm of “one world, two systems”.

It is worth noting that the US-China Economic and Security Review Commission itself was established by Congress in 2000 to monitor the evolution of the relationship between the two countries, even if China is becoming a member of the World Trade Organization. People have high hopes—but even at the time there were doubts—that China will become more free as it becomes richer. Of course, these suspicions are well-founded.

Anyone who believes that business between the two countries will not be more restricted should read the report carefully.

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