Five Reasons to Pass Outbound Investment Controls
Special Interests Value Their Profit over Your Security
Today, the Chair of the House Financial Services Committee and the chairs of all of its subcommittees published a letter arguing against outbound investment controls with regards to the People’s Republic of China. Readers of Breaking Beijing should not be surprised by this development. I talked a bit about it in “Where Did All the China Hawks Go?” last month. I also wrote last year about the need for comprehensive reform on economic security agencies from Treasury to Commerce. As for the specific outbound investment language at issue today, the Senate has included its version in the NDAA, but House leadership has stripped it, no doubt at the request of Chairman McHenry (R-NC) and special interests. This letter seeks to force the issue, propose laughable alternatives (like somehow making Americans sit on Chinese corporate boards??), and to ultimately kill much-needed global financial regulation so American corporations won’t have to stand in the spotlight and explain why their money is funding a genocidal regime and the PLA that actively trains and modernizes to kill Americans and our allies. We didn’t have this problem with the Soviets. It’s amazing what money will do to your sense of moral clarity. While I often write to advocate for my policy ideas, very rarely do I single out a specific piece of legislation, however I consider outbound investment controls like the ones in the NDAA to be of critical importance to US national and economic security.
First off, let’s be very clear about why the House Financial Services Committee doesn’t want the American people or the US government to regulate outbound investment: they don’t want to be held to account for funding foreign companies like CCP-backed corporations complicit in genocide or who help grow the PLA war machine. China hawks have fought for years to get some sort of control over the money flowing into the PRC from US corporations but have always been blocked by those who represent the interests of those corporations, even when their job is supposed to be oversight. At it’s most recent peak, US investment in the PRC was in the hundreds of billions. Thanks to the CCP tripping over itself with its harsh crackdown and harassment of foreign executives, Zero-COVID chaos, financial regulatory policies aimed at stealing IP and squashing competition, a lot of that money has fled….but when other markets eventually turn bad and the CCP flashes a nice smile, that money will return. It’s a longstanding trope of American history that the Chinese market is simply too lucrative to keep closed, even when decades of policy shows it only hurts us. For those investing in the PRC, this isn’t about free market principles, it’s about letting corporations get away with their immoral investment in the regime of the Chinese Communist Party. They don’t want to have to care about the brutality of the regime, the genocide, the threat of war, so long as it doesn’t affect their quarterly earnings reports. The Financial Services Committee and its backers would much prefer the clumsy, easily circumvented status quo. Even more, they’d prefer we return to the days when no one batted an eye at investment in a CCP-backed genomics company doing race-related research or an AI firm aiding in the surveillance of minorities. Chairman McHenry has publicly called for more American investment in the PRC, not less. This isn’t about nuanced governance or moderation, it’s about quarterly earnings at all costs.
So today I’d like to give you five good reasons why we need a strong outbound investment regulatory architecture.
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Reason 1: American money shouldn’t be funding the PLA or the dual-use technology companies that help it modernize to overcome the US military’s dwindling edge. This is pretty straight forward. We’ve already seen issues where Russian technology in Ukraine is found to have US parts or components. If we go to war, I would prefer we not lose thousands just because a few American investors wanted to make money. Folks love to talk about war profiteering…investing in companies that help the PLA is future war-profiteering….oh and it’s present day genocide-profiteering.
Reason 2: It is a proactive, comprehensive approach rather than a reactive, cherry-picked approach to policy vulnerable to special interests. Right now, we are taking a reactive, slow, and inept approach to outbound investment regulation. This isn’t about stopping all outbound investment, even to the PRC, it’s about creating a framework that makes the process both easier to navigate, and harder to sneak around. In the past, PRC companies have simply created new spin-offs for American companies to sell and invest in when they are blacklisted, by moving to a comprehensive outbound control architecture, this ends the ineffective whack-a-mole game we have played for the last few years. I can say from personal experience that without these changes, American companies will gladly look the other way to make a quick buck. The Chinese market is simply too lucrative in the eyes of many investors, even if it’s harmful in the long term to the company or American security. And to be sure, this doesn’t mean that the US can’t invest in PRC-based companies at all, it means that the USG gets to take a look *before* that money goes overseas, to ensure it doesn’t degrade US national security or further human rights violations.
Reason 3: When it comes to corruption and accountability of US companies, transparency matters. If you don’t trust companies to be honest at home, why would you trust them with a totalitarian regime that is preparing for war with the United States? This isn’t about small businesses or free market integrity, this is about hedge funds and large corporations putting short-term profit over your security. Do you want your hard-earned pension money funding the PLA? And even if you don’t care, shouldn’t those funds at least have to answer for taking that risk, especially when many corporations from banks to industry have been subsidized or bailed out by US taxpayer dollars? We may not be able to agree at home on how much regulation is needed around Wall St and US industry, but surely we can all agree that we shouldn’t be dumping money into technology firms abroad that help the military of a hostile regime that is actively perpetuating a genocide. That should be our ethical minimum.
Reason 4: Solidifying an outbound regulatory architecture makes the market (and US taxpayers) less vulnerable to shock and coercion during crisis. If you’re not concerned about ethics in your investments, then consider the volatility of your portfolio. The PRC needs our money, but the CCP also sees US investment as a lucrative form of coercion in order to restrict American attempts to focus defense priorities in the Pacific, hold the CCP’s feet to the fire on human rights, and to keep us wary of domestic pain during a crisis as a result of a market crash. Since its peak of a few hundred billion dollars during the pandemic, US investment in the PRC has dropped significantly, but that can change rapidly should the markets change. Creating a solid, comprehensive outbound investment architecture reduces market exposure to crisis, and reduces the CCP’s ability to coerce the USG during a crisis or negotiations.
Reason 5: It solidifies and widens the scope of President Biden’s executive order on outbound investment. In August of 2023, President Biden signed an executive order (after much delay) creating a watered down outbound investment architecture. There is bipartisan support to regulate outbound investment, but we can do better than what we have right now. As I wrote last month, the problem isn’t red or blue on China, but a battle of American economic and national security verses special interests that extend across both parties. Putting this into law, not executive order, ensures that we have a regulatory regime that is here to stay, and not subject to the whims of an executive alone.
At the end of the day, the average American does not benefit from hedge fund or corporate investment in the PRC. Short-term quarterly earnings aren’t worth your union pension being held hostage, or worse purposely tanked, by a genocidal regime. There are dozens of other developing and allied countries out there that have flourishing economies and opportunities who we can invest in without the threat of World War III dictating the value of your portfolio.
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