Rep. Gallagher Asks Biden to Ensure US Money Doesn’t Support Chinese Military Buildup, Rights Abuses

Subcommittee chairman Rep. Mike Gallagher (R-Wis.) speaks during a House Armed Services Subcommittee on Cyber, Information Technologies, and Innovation hearing about artificial intelligence on Capitol Hill in Washington on July 18, 2023. Drew Angerer/Getty Images

Rep. Mike Gallagher (R-Wis.) urged President Joe Biden to take steps to ensure that U.S. investments will not be used to fund the Chinese Communist Party’s (CCP) human rights abuses and technological developments posing a national security risk to the United States.

“For too long, America has funded the CCP’s military buildup, technological ambitions, and human rights abuses and allowed the CCP unconstrained access to our capital markets and dynamism and efficient capital allocation that they enable,” wrote Mr. Gallagher, who chairs the House Select Committee on the Chinese Communist Party.

The Thursday letter (pdf) comes on the heels of news that the president already has a draft executive order on new restrictions on U.S. technology investments in China, focusing on semiconductors, artificial intelligence, and quantum computing. Bloomberg reported last week that the president could sign the order by mid-August.

Mr. Gallagher praised the executive order and asked that Mr. Biden add “several core principles” to reduce “serious national security issues that we face.”

US Firms Pour Money Into China

According to a May report published by the American Enterprise Institute, Americans invested $1.18 trillion in Chinese stocks in 2021.

“Many intelligent, well-meaning people claim the U.S. is in a serious competition with China. They are wrong. No country in serious competition with another sends it almost $800 billion over four years. This is what the U.S. did between 2017 and 2020,” the report reads.

Mr. Gallagher further referenced committee investigations that found that BlackRock and MSCI have directed funds into more than 60 blacklisted Chinese entities. The committee found that in five of BlackRock’s funds, $429 million were invested in flagged Chinese firms, and nearly 5 percent of the MSCI China A Index went toward blacklisted Chinese companies, representing just the tip of the iceberg. Both companies manage about $22 trillion in assets.

The committee is poised to investigate whether those investments resulted in U.S. dollars used to fund the CCP’s military or human rights abuses.

“As you know, some U.S. investment flowing into the PRC [People’s Republic of China] poses a significant national security risk, exposes Americans to material and systemic financial risks, and makes them complicit—often unwittingly—in human rights abuses,” Mr. Gallagher wrote in his letter.

Yet there is currently no mechanism for preventing this, and the United States lacks data on the exact amount of money going to China.

“Despite these clear risks and the U.S. Government’s longstanding efforts to address national security threats stemming from inbound foreign investment, no mechanism exists for the U.S. Government to require disclosure of, much less restrict, outbound capital flows into such foreign adversary companies,” he wrote.

“As Congress debates competing approaches—including so-called ‘outbound CFIUS (Committee on Foreign Investment in the United States)’ and the imposition of aggressive sanctions against known PRC military companies—I urge you to take meaningful first steps towards effective and balanced outbound investments rules in the interim.”

Recommendations

Mr. Gallagher outlined several recommendations that could be addressed via the executive order.

First, the order must include private (venture capital, private equity) funding and public investments (the majority). Second, technology-related sectors that support the CCP’s forced labor and genocide need to be restricted.

“This could start with five to six priority sectors from the critical and emerging technologies identified by your Office of Science and Technology Policy,” he wrote. “Follow-on rules could include the remaining sectors on that list as well as those prioritized by the PRC ... those rules should ensure that U.S. money does not support the ongoing People’s Liberation Army (PLA) buildup, facilitate the CCP’s human rights abuses or techno-totalitarian surveillance system, or deepen our dependency on the PRC in critical supply chains.”

He further recommended investment rules to “safeguard shareholder rights,” holding Chinese companies to the same due-diligence standards as domestic companies, “including by addressing the obvious risks posed by variable interest entity structures.”

Mr. Gallagher said that, as much as possible, the restrictions should not operate on a case-by-case screening basis that would be “unwieldy, impractical, and unnecessarily burdensome to the U.S. private sector.”

He added that the United States should take the lead in creating such investment rules so that allies will follow.