[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


               TAKING STOCK OF ``CHINA, INC.'': EXAMINING
                 RISKS TO INVESTORS AND THE U.S. POSED
                   BY FOREIGN ISSUERS IN U.S. MARKETS

=======================================================================

                            VIRTUAL HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON INVESTOR PROTECTION,

                 ENTREPRENEURSHIP, AND CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 26, 2021

                               __________

       Printed for the use of the Committee on Financial Services   
   

                           Serial No. 117-56
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                          
                                                      
                              __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
46-245 PDF                 WASHINGTON : 2022                     
          
-----------------------------------------------------------------------------------   
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York           BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            ANN WAGNER, Missouri
ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
JIM A. HIMES, Connecticut            ROGER WILLIAMS, Texas
BILL FOSTER, Illinois                FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio                   TOM EMMER, Minnesota
JUAN VARGAS, California              LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York             JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts      BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina           LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan              WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania         VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York   PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
        Subcommittee on Investor Protection, Entrepreneurship, 
                          and Capital Markets

                   BRAD SHERMAN, California, Chairman

CAROLYN B. MALONEY, New York         BILL HUIZENGA, Michigan, Ranking 
DAVID SCOTT, Georgia                     Member
JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
BILL FOSTER, Illinois                FRENCH HILL, Arkansas
GREGORY W. MEEKS, New York           TOM EMMER, Minnesota
JUAN VARGAS, California              ALEXANDER X. MOONEY, West Virginia
JOSH GOTTHEIMER. New Jersey          WARREN DAVIDSON, Ohio
VICENTE GONZALEZ, Texas              TREY HOLLINGSWORTH, Indiana, Vice 
MICHAEL SAN NICOLAS, Guam                Ranking Member
CINDY AXNE, Iowa                     ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois                BRYAN STEIL, Wisconsin
EMANUEL CLEAVER, Missouri            VAN TAYLOR, Texas
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 26, 2021.............................................     1
Appendix:
    October 26, 2021.............................................    43

                               WITNESSES
                       Tuesday, October 26, 2021

Chu, Claire, Senior Analyst, RWR Advisory Group..................     8
Lorber, Eric, Senior Director, Center on Economic and Financial 
  Power, Foundation for Defense of Democracies...................    10
Ross, Samantha, Founder, AssuranceMark, The Investors' Consortium 
  for Assurance..................................................     7
Sutter, Karen M., Asian Trade and Finance Specialist, 
  Congressional Research Service (CRS)...........................     5

                                APPENDIX

Prepared statements:
    Chu, Claire..................................................    44
    Lorber, Eric.................................................    68
    Ross, Samantha...............................................    77
    Sutter, Karen M..............................................    85

              Additional Material Submitted for the Record

Hill, Hon French:
    Written statement of the American Securities Association.....   100
McHenry, Hon. Patrick:
    Written statement of the Coalition for a Prosperous America..   103
    Written statement of the Center for Capital Markets 
      Competitiveness, U.S. Chamber of Commerce..................   112
    Committee on Capital Markets Regulation, ``Assessing the 
      Future of U.S. Listings by Chinese Companies: A Call for 
      Structured Dialogue''......................................   116
Meeks, Hon. Gregory W.:
    Written responses to questions for the record submitted to 
      Eric Lorber................................................   152
    Written responses to questions for the record submitted to 
      Karen Sutter...............................................   153

 
                    TAKING STOCK OF ``CHINA, INC.'':
                      EXAMINING RISKS TO INVESTORS
                     AND THE U.S. POSED BY FOREIGN
                        ISSUERS IN U.S. MARKETS

                              ----------                              


                       Tuesday, October 26, 2021

             U.S. House of Representatives,
               Subcommittee on Investor Protection,
             Entrepreneurship, and Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:06 a.m., 
via Webex, Hon. Brad Sherman [chairman of the subcommittee] 
presiding.
    Members present: Representatives Sherman, Scott, Himes, 
Foster, Vargas, Gottheimer, Gonzalez of Texas, Axne, Casten; 
Huizenga, Wagner, Hill, Emmer, Mooney, Davidson, Hollingsworth, 
Gonzalez of Ohio, Steil, and Taylor.
    Ex officio present: Representative Waters.
    Also present: Representative Barr.
    Chairman Sherman. The Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of this subcommittee are authorized to 
participate in today's hearing.
    Today's hearing is entitled, ``Taking Stock of `China, 
Inc.': Examining Risks to Investors and the U.S. Posed by 
Foreign Issuers in U.S. Markets.''
    I will now recognize myself for 4 minutes for an opening 
statement. I believe the Chair of the Full Committee, 
Chairwoman Waters, will be here soon for a 1-minute opening 
statement as well. If not, I will also claim her 1 minute and 
reiterate some of the same points.
    The intertwining of the American and Chinese economies has 
given China substantial power here in the United States. It 
really hasn't given America any power, political power in 
Beijing.
    We have great witnesses here today, but the most articulate 
witnesses are those who are not here today. Their decision to 
pull out of this hearing due to pressure, economic pressure, 
speaks loudly to China's strong economic power over politics 
and economics here in the United States.
    There are those who think that we shouldn't encourage or 
allow investment in China because it means American capital is 
flowing to their economy, but let us remember that this is a 
two-way street. Some $1.2 trillion of American capital is 
invested in China in their securities, not to mention $116 
billion of direct investment. But some $2 trillion of Chinese 
capital is invested in American securities.
    But we do have to make sure, if it is going to be a two-way 
street, that it is a fair street. We have heard of Luckin 
Coffee, Evergrande, and DiDi.
    Luckin Coffee tells us that we need good audits and good 
oversight of those audits, and that the Public Company 
Accounting Oversight Board (PCAOB) needs to oversee the audits.
    DiDi illustrates the issue of whether the boards of 
directors of companies are loyal to the shareholders, and 
whether the corporations have property rights that are 
protected by the courts of China, or whether you, in fact, are 
investing in a company whose assets could disappear due to 
capricious government action.
    The SEC has created special rules for foreign private 
issuers, based on the idea that, say, that private issuer from 
abroad is from the United Kingdom, where you get all of the 
investor protection from the host country. And then, we will 
just add a little bit of American investor protection; we don't 
need all of the usual American investor protection. That model 
obviously needs to be turned on its head in dealing with China, 
where you get little or no investor protection from the home 
country.
    We see that China is able to pressure index funds to 
include Chinese companies, but it is not Chinese companies that 
are in the index funds. An index fund may choose to put the 
1,000 biggest companies in the world in the index, but you 
can't buy Alibaba; you buy Alibaba of the Cayman Islands.
    Now, Alibaba is one of the 1,000 biggest companies in the 
world, but Alibaba Cayman Islands--the Cayman Islands isn't 
even one of the thousand biggest islands in the world. You are 
investing in a shell company, that invests in another shell 
company, that has a contractual relationship with Alibaba. Does 
that belong in an index?
    But we do see that China is able to pressure Morgan Stanley 
and others to include these questionable entities in indexes. 
Now, when you invest in China, you are investing in a police 
state to some degree, one that imprisons a million Uyghurs in 
Xinjiang.
    We will be discussing a number of bills here before us, two 
that were noticed early, the Accelerating Holding Foreign 
Companies Accountable Act, and a second one which deals with 
the Uyghur Forced Labor Disclosure Act.
    I have also quickly, in advance of this hearing, 
distributed bills designed to force a review by the SEC of the 
special status they give private foreign issuers to see if that 
is relevant to companies based in China. And a bill to prohibit 
a phony name from being used; you shouldn't call yourself, 
``Alibaba,'' if you are not, ``Alibaba,'' but you are really, 
``Cayman Islands Alibaba.'' And finally, we will get into the 
variable interest entities (VIEs), which are not real 
companies, and whether they belong in indexes.
    At this point, I will recognize the ranking member for his 
opening statement, and I wonder whether I should recognize him 
for 4 minutes or for 5 minutes? Do you have the whole 
Republican time?
    Mr. Huizenga. Yes, at this point, I do and--
    Chairman Sherman. Then, I will recognize you for 5 minutes.
    I now recognize the ranking member of the subcommittee, the 
gentleman from Michigan, Mr. Huizenga, for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Actually, before I get into my comments, I am curious if 
you could clarify two things? One, those bills that you were 
just talking about, were they noticed for this hearing, or did 
you just introduce them? Because we were not aware of them.
    Chairman Sherman. Those are, at most, discussion drafts 
that I circulated just yesterday. And--
    Mr. Huizenga. Okay.
    Chairman Sherman. --they are among the many things that 
will be discussed here today.
    Mr. Huizenga. Okay. Well, I am looking forward to getting 
our hands on those and having that conversation. And then, I 
would appreciate it, too, if you would clarify--you mentioned 
the four witnesses that we have before us, but you mentioned 
that there were some others who either refused or didn't come 
or felt pressure, because I fully believe that. We have seen 
that with, whether it is entertainment companies, others, the 
NBA. There has been a lot of pressure, but I am curious if you 
could clarify that?
    Chairman Sherman. I am not here to end any careers on Wall 
Street by explicitly identifying names. There are those with 
whom we were in discussions, some who had actually agreed to 
come testify, then notified us that they decided it was in the 
interest of their careers that they not appear before us. We 
decided not to have one of those witnesses in the House Foreign 
Affairs Committee, where we have had people who might be 
subject to torture. We have had screens and muffled voices 
there, but we chose not to do that here.
    Mr. Huizenga. Understandable. I am going to reclaim my 
time, because I do need to get through my statement, and I, 
too, am not in the business of endangering that, but certainly 
that is a significant, serious accusation that is getting 
thrown out. So, I think it is important that we begin this 
hearing by level setting and acknowledging what is really 
happening with China and the Chinese Communist Party (CCP). We 
often just use the acronym and kind of blow over what it 
actually stands for.
    China is gearing up for a fight to attempt to replace the 
U.S. as the premier world leader, both economically and 
geopolitically. China's preparation to compete with us relies 
on ensuring that the CCP's control is absolute. That is exactly 
what the CCP has been working towards. It is critical that we, 
as policymakers, acknowledge this fact. If we don't, we are 
missing a bigger picture and a bigger threat, and doing so will 
lead to short-sighted half measures in response to China's 
threat.
    I am a little afraid we may be losing sight with today's 
hearing. I just want to make sure that we are not. China's 
threat is far greater than just that of investment-related 
risk. It is far more multidimensional, and therefore, we have 
to be far more multidimensional.
    Legislation like the Holding Foreign Companies Accountable 
Act (HFCAA), which passed on a bipartisan basis last Congress, 
represents one of the important pieces that should be a well-
rounded, multi-pronged approach from Washington. It properly 
corrected an investor protection imbalance whereby China- and 
Hong Kong-based companies were operating under different rules 
than everyone else. That certainly cannot stand.
    But we should be focusing on how to complement the HFCAA 
with policies pulled from a diverse toolkit beyond the 
securities laws. For example, attempting to deal with the 
threat of China through mandatory disclosures that are 
unrelated to financial materiality for foreign policy purposes, 
I believe is also a bit shortsighted. These disclosures will 
not likely change China's behavior, especially considering 
these disclosure requirements would be applicable to all public 
companies, no matter where they are incorporated.
    The SEC tends to be the wrong agency to address national 
security and human rights issues, and we have seen that before 
with things like the failed conflict minerals provisions of the 
Dodd-Frank Act, et cetera.
    For example, we should be sanctioning Chinese firms instead 
that pose national security threats, and imposing export 
controls to deprive these Chinese firms--(government)--of 
advanced technologies needed for their quest for global 
dominance.
    Fostering entrepreneurship and encouraging business 
activity should be another policy priority of ours to deal with 
China's threat. Chinese regulators have been cracking down on 
their own entrepreneurs and shutting them off from foreign 
investment. So, we have an opportunity here, folks.
    In response, doubling down on American economic growth 
through innovation and promoting economic freedom would be a 
tremendously effective approach for us in contrast to the top-
down authoritarian approach of the CCP.
    Again, we have an opportunity. Let's seize it. Fostering 
entrepreneurship and encouraging business activity are squarely 
within our subcommittee's jurisdiction and explicitly within 
the SEC's mission.
    So, let's discuss those policies. Outcompeting China in the 
long term will depend on American economic growth. If we are 
only focused on addressing China through ineffective mandatory 
disclosures, and not growing our economy, then we are choosing 
to face the threat of China with both hands tied behind our 
back.
    And with that, I yield back.
    Chairman Sherman. I thank the distinguished ranking member 
for his statement.
    I will now recognize the Chair of the full Financial 
Services Committee, Chairwoman Waters, for 1 minute, and also 
indicate that if Chairwoman Waters wants to be the first 
questioner, that would be my honor as well.
    Chairwoman Waters. Thank you, Chairman Sherman. I am very 
pleased that you are holding this hearing today.
    Our capital markets are the envy of the world, raising 
trillions of dollars for large and small businesses, and 
supporting the retirement and savings of investors. Our markets 
work because participants have to play by the rules.
    For example, companies that want to raise capital, gain the 
trust and confidence of investors by providing access to 
reliable and accurate financial information. Our regulators 
then have unhindered access to both this information and those 
who audit the information.
    However, some jurisdictions, like the People's Republic of 
China, have created obstacles to this effective oversight and 
are undermining the bedrock of investor confidence. So, I look 
forward to reviewing the actions that Congress and the SEC can 
take to protect our markets.
    I thank you, and I yield back my time.
    Chairman Sherman. Thank you.
    Today, we welcome the testimony of our distinguished and, 
in some cases, courageous witnesses: Karen Sutter, a specialist 
in Asian trade and finance with the Congressional Research 
Service; Samantha Ross, the founder of AssuranceMark, The 
Investors' Consortium for Assurance; Claire Chu, a senior 
analyst with RWR Advisory Group; and Eric Lorber, the senior 
director of the Center on Economic and Financial Power at the 
Foundation for Defense of Democracies.
    Witnesses are reminded that their oral testimony will be 
limited to 5 minutes. You should be able to see the timer on 
your desk in front of you that will indicate how much time you 
have left. When you have 1 minute remaining, a yellow light 
will appear. I will ask you to be mindful of the timer, and 
when the red light appears, to please wrap up very quickly.
    And without objection, your written statements will be made 
a part of the record.
    Ms. Sutter, you are now recognized for 5 minutes.

   STATEMENT OF KAREN SUTTER, SPECIALIST IN ASIAN TRADE AND 
         FINANCE, CONGRESSIONAL RESEARCH SERVICE (CRS)

    Ms. Sutter. Good morning. Chairman Sherman, Ranking Member 
Huizenga, distinguished members of the subcommittee, thank you 
for inviting the Congressional Research Service to testify 
today.
    I would like to raise six points today for your 
consideration.
    To start, I would like to discuss how China is selectively 
opening its financial markets to a few U.S. investment firms, 
allowing them to expand China offerings to U.S. investors. 
These firms see growth opportunities in China, but their market 
participation is still curtailed by Chinese government controls 
and the dominant market position of China's large state banks.
    Some U.S. firms and investors may profit from investments 
in Chinese companies, but these transactions appear to leave 
U.S. investors in a passive role in three respects.
    One, U.S. financial investors cannot leverage the 
productive industrial or technological capabilities that their 
capital may help China to develop.
    Number two, U.S. financial investments do not appear to 
open China's economy to U.S. competition, especially in 
strategic industries that they fund.
    Number three, the Chinese government can exercise control, 
influence, and discretion over U.S. investments and the 
underlying business operations and assets that are in China.
    Next, I would like to discuss the limited and targeted 
nature of China's financial investment openings to date which 
appear designed in part to attract capital, U.S. capital to 
areas where China's economy is weak, such as bad assets and 
debt. Increased U.S. capital flows to China's debt markets 
could create growth opportunities, but also could create 
increased U.S. risk exposure by placing more U.S. capital in 
areas where there are systemic market risks. The Chinese 
government's current efforts to address debt and overcapacity 
in its property market highlights an example of such risks.
    Third, the Chinese government appears to be seeking U.S. 
capital and expertise to fund its strategic and emerging 
industries, to strengthen China's capital markets, and to 
position Chinese firms as global leaders and competitors. U.S. 
investors are funding some companies that are tied to the 
Chinese government's dual use industrial policies, such as Made 
in China 2025.
    Similarly, China is investing in some U.S. firms that have 
technologies and capabilities that the government is seeking to 
advance its goals. While these investments may promote economic 
growth, offer strong returns for some U.S. investors, and 
provide financing for certain firms, at the same time, they 
also may develop competitive Chinese capabilities.
    Fourth, the role of the state in China's economy and 
business ecosystem has increased dramatically since 2014, under 
China's leader Xi Jinping. This is intensifying the potential 
challenges and risks in financial and commercial ties with 
China for U.S. companies, U.S. investors, and the United States 
more broadly. A significant increase in two-way financial 
investment could give the Chinese government greater influence 
over U.S. companies, as well as the U.S. and global 
marketplace.
    Fifth, the corporate structures that Chinese firms are 
using to expand overseas and invest in U.S. capital markets, 
such as the variable interest entity (VIE) are complex. These 
structures appear to make it difficult for U.S. investors to 
assess potential risks. While U.S. underwriters, accountants, 
or legal counsel may have insights into these risks, they may 
not share this knowledge fully with U.S. investors, who 
ultimately bear the costs of these risks.
    These complex corporate structures also separate the 
underlying Chinese company and its operations and assets from 
U.S. investors. This potentially limits the ability of U.S. 
investors to exercise their rights, including the right to seek 
full legal recourse if necessary.
    In closing, I would like to discuss nonpublic transactions. 
There appears to be a lack of transparency on deals and an 
absence of publicly available data on the main and growing two-
way investment pathways, which include private equity, venture 
capital, and private placements. This situation is complicated 
by U.S. and Chinese monies that appear to be increasingly 
commingled through funds that operate in the United States and 
China.
    Without greater transparency, it is difficult to assess how 
some financial transactions may support related deals that 
could involve the transfer of technology or know-how. 
Transparency gaps also potentially affect the U.S. Government's 
ability to assess aggregate U.S. financial and economic 
exposure to China and potential risks.
    Thank you for your consideration. I look forward to your 
questions.
    [The prepared statement of Ms. Sutter can be found on page 
85 of the appendix.]
    Chairman Sherman. Ms. Ross, you are now recognized for 5 
minutes.

    STATEMENT OF SAMANTHA ROSS, FOUNDER, ASSURANCEMARK, THE 
              INVESTORS' CONSORTIUM FOR ASSURANCE

    Ms. Ross. Thank you.
    Chairman Sherman, Ranking Member Huizenga, Chairwoman 
Waters, and members of the subcommittee, I am pleased to appear 
before you today to discuss the significant risks that 
investors face from China-based companies that benefit from 
access to U.S. markets but do not comply with the important 
investor protections under U.S. law.
    My testimony is based on my experience of over 18 years 
serving in the Division of Enforcement at the SEC, where I 
gained firsthand knowledge of fraudulent accounting practices 
by foreign private issuers, and at the Public Company 
Accounting Oversight Board (PCAOB), where I helped design audit 
oversight rules and initiatives that laid a framework to 
protect investors in foreign companies that issue securities in 
U.S. markets.
    The PCAOB's job is to oversee and inspect the auditors of 
companies that access U.S. public capital markets. Eight 
hundred and forty non-U.S. accounting firms from more than 80 
jurisdictions are registered with the PCAOB in order to be able 
to prepare or participate in the preparation of audit reports 
provided to U.S. investors and submitted to the SEC.
    Not all of these firms actually do so, though, but when 
they do, the PCAOB is required to inspect their work to ensure 
that their audits comply with our standards. Both independently 
and through numerous cooperative agreements with local 
authorities, the PCAOB is able to inspect firms in all relevant 
jurisdictions except Mainland China and Hong Kong.
    The People's Republic of China's (PRC's) resistance to the 
PCAOB's inspections is not just a theoretical compliance issue. 
Our markets are being tested by a string of frauds by China-
based companies that obtained capital from our markets but 
failed to comply with our investor protection rules.
    By enacting the Holding Foreign Companies Accountable Act 
and continuing vigilant monitoring through hearings such as 
this one, Congress is playing a critical role in signaling that 
companies that seek access to capital from U.S. markets must 
adhere to our rules.
    I also commend the SEC and the PCAOB for the decisive 
approach they are taking to implement the Holding Foreign 
Companies Accountable Act.
    A great body of research documents the benefits that 
foreign private issuers obtain by issuing securities in the 
United States. Those benefits include a lower cost of capital 
than they would face in their home-country capital markets. The 
linchpin of these benefits is the binding commitment companies 
make to our standards, including high-quality financial 
reporting requirements and a reliable third-party audit. 
Enforcement of this commitment, rather than relying on mere 
assertions of compliance, is what distinguishes U.S. listings 
and produces their capital market benefits.
    PCAOB inspections are a critical component of our 
enforcement regime. Inspections examine whether third-party 
auditors are, in fact, holding companies to their commitments 
to produce high-quality and reliable financial reports. There 
is empirical evidence that capital markets find financial 
reporting more credible following introduction of PCAOB 
inspections in non-U.S. jurisdictions. That is, investors put 
more faith in financial reporting when the PCAOB is able to 
inspect.
    China-based companies free-riding on U.S. markets, without 
complying with U.S. audit regulations, increases fraud risks 
for investors in those companies. But that is not the only 
reason why it is important to stop the free-riding. It also 
harms our markets more broadly. The benefits I have described 
exist because participation in our markets means something. It 
is a signal of the quality and reliability of the financial 
reporting of the companies that list here.
    As we saw in the days of the Enron scandal, when any group 
of participants fails to comply with our standards, that sends 
a signal that weakens confidence in the whole market. For the 
benefits to continue to flow to compliant U.S. and non-U.S. 
companies, it must be clear that we enforce our standards 
across-the-board.
    In conclusion, audit regulators around the world cooperate 
in PCAOB inspections of registered firms' audits of companies 
that offer securities in the United States. The PRC is the only 
government that blocks them. This causes serious harm to both 
investors in such companies, as well as our public capital 
markets more broadly.
    I commend the work you have done to put an end to these 
harms, as well as the work the SEC and the PCAOB have done to 
implement the Holding Foreign Companies Account Act. Based on 
the heightened risks evident from a string of frauds that have 
already been revealed, it will also be important to ensure that 
China-based companies that are prohibited from trading on our 
public markets do not turn to other ways to access U.S. 
capital. And therefore, I commend your continued vigilance.
    Thank you.
    [The prepared statement of Ms. Ross can be found on page 77 
of the appendix.]
    Chairman Sherman. Thank you for your testimony.
    Ms. Chu, you are now recognized for 5 minutes.

  STATEMENT OF CLAIRE CHU, SENIOR ANALYST, RWR ADVISORY GROUP

    Ms. Chu. Chairman Sherman, Ranking Member Huizenga, and 
distinguished members of the subcommittee, thank you for the 
opportunity to testify before you today.
    I am a senior analyst at RWR Advisory Group, a research and 
advisory firm based here in Washington, D.C., where I 
specialize in the geopolitical and national security risk 
implications of China's commercial activity and overseas 
engagement.
    I have been asked to provide some context on the nature of 
Chinese corporate actors and their role in China's state-led 
economy. I will also lay out several risks to investors and the 
United States, followed by recommendations.
    The Communist Party of China's (CCP's) involvement, 
influence, and control over the commercial sector means that 
Chinese companies are beholden to the party-state and can be 
compelled to sacrifice corporate interests for government 
favor. Corporate actors are directed to meet state planning 
targets, and CCP officials are embedded within the operations 
of large companies to ensure regulatory compliance.
    The government essentially has the power to determine 
whether a company is allowed to raise capital, provide goods 
and services, or even continue to operate as a for-profit 
enterprise. There are clear incentives for companies to welcome 
CCP guidance and to operate in ways that are conducive to the 
state's interests. Companies can also be subjected to coercive 
and arbitrary punishment for crossing party-state lines.
    The heavy-handed, reactive nature of the Chinese regulatory 
apparatus can sometimes undermine its own companies and, by 
extension, American investors in those very companies. China's 
recent regulatory broadside has left the U.S. financial 
industry grappling with the challenge of quantifying the effect 
of government corporate intervention. This kind of uncertainty 
has a material adverse impact on companies and investors, who 
cannot be sure if IPOs will go ahead or if entire industries 
will be banned from raising funds in the capital markets.
    What really amplified the impact of this latest spate of 
regulatory action and made it front-page news was the high 
level of global financial exposure to the stocks of those 
affected companies. The Chinese government prioritizes state 
stability and social control over commercial gains. The more 
intertwined the U.S. and Chinese markets become, the more 
acutely U.S. investors will feel the aftershocks of Beijing's 
politically driven market interventions.
    The U.S. commitment to high-quality, reliable disclosures 
and financial reporting is a key element of its ability to 
protect investors and market participants.
    The Chinese party-state's sweeping bureaucratic authority, 
opaque legal system, and complex corporate structures obscure, 
often intentionally, a Chinese company's beneficial ownership 
and financial realities. Beijing also uses lack of transparency 
as an economic advantage, creating information asymmetries to 
control and moderate foreign flows into the Chinese market. 
These China-specific risk factors make it particularly 
challenging for U.S. regulatory authorities to conduct proper 
due diligence and can prevent U.S. investors from being able to 
make informed investment decisions.
    Variable interest entities (VIEs), for example, are legally 
ambiguous corporate structures used by Chinese companies to 
list on U.S. exchanges. VIE shareholders have no recourse. The 
operating company's underlying assets and the moral hazard 
risks are substantial.
    Chinese companies seeking to issue unregistered securities 
in the United States are able to circumvent strict standards by 
taking advantage of the SEC safe harbors, like Regulation S and 
Rule 144A.
    With the rapid inclusion of China A-shares into major stock 
indices, the expansion of Stock Connect schemes, and the 
quadrupling of A-share weighting in certain benchmarks, U.S. 
investor access to the publicly-traded Chinese companies has 
expanded dramatically over the past few years. Index providers 
like MSCI and FTSE Russell have become a power force, serving 
as intermediaries and gatekeepers between Chinese companies and 
U.S. markets, exercising virtually unchecked, unregulated 
authority over the volume of U.S. capital flows to China.
    The criteria evaluated by index providers to support 
inclusion and weighting decisions are limited to standardized 
attributes, like market cap and liquidity, and neglect to 
consider the reputational and China-specific factors like 
state-sanctioned human rights abuses or financial exposure to 
party-state policymaking.
    U.S. retail and institutional investors are consequently 
exposed to a wide range of Chinese companies engaged in 
activities that are contrary to the national security and 
foreign policy interests of the United States. Many are already 
sanctioned by the U.S., but not subject to any capital markets 
restrictions, no investment restrictions, or divestment 
mandates, and are thus able to continue raising capital in the 
U.S. markets.
    The current U.S. securities regulatory framework will need 
to evolve with greater, more targeted oversight, disclosure 
enforcement, China-specific due diligence, and sanctions 
alignment to respond in kind to the unique risk associated with 
this influx of securities listed overseas in institutional 
environments where the disclosure requirements and corporate 
governance practices don't offer the same protections for 
investors as in the United States.
    Thank you, and I look forward to your questions.
    [The prepared statement of Ms. Chu can be found on page 44 
of the appendix.]
    Chairman Sherman. Thank you.
    And Mr. Lorber, you are now recognized for 5 minutes.

 STATEMENT OF ERIC LORBER, SENIOR DIRECTOR, CENTER ON ECONOMIC 
   AND FINANCIAL POWER, FOUNDATION FOR DEFENSE OF DEMOCRACIES

    Mr. Lorber. Chairman Sherman, Ranking Member Huizenga, and 
distinguished members of the committee, I am honored to appear 
before you today to discuss the risks to investors and the 
United States posed by Chinese issuers in U.S. markets.
    I come before this committee as a sanctions and compliance 
professional, having worked at the U.S. Department of the 
Treasury, and advised financial institutions, corporations, 
humanitarian organizations, and individuals on ensuring they 
operate in compliance with their legal sanctions obligations. 
As part of my work in both the public and the private sectors, 
I have seen firsthand the power of U.S. economic sanctions in 
furthering U.S. foreign-policy objectives, and while sanctions 
are not a panacea, they can be used in narrow and targeted ways 
to great effect.
    One area where the United States has increasingly used this 
tool is in the global competition with China. As Congress and 
the Biden Administration consider ways to protect U.S. markets 
from abuse and push back against certain Chinese activities 
that threaten U.S. national security, sanctions remain one of 
the top policy levers to consider pulling.
    Safeguarding transparency in the global financial system 
and in U.S. markets is critical to protecting U.S. national 
security and the strength of the U.S. financial system. A core 
part of providing this transparency is ensuring that U.S. 
investors have access to relevant material information about 
foreign companies in order to make informed decisions. Over the 
last few years, the United States has taken important steps to 
ensure that Chinese companies attempting to access U.S. markets 
must play by the same rules as U.S. companies, and do not 
produce significant material risk in U.S. investors' portfolios 
due to their lack of financial transparency.
    At the same time, we must balance those considerations 
against the risk of creating an onerous set of disclosure 
requirements that deter companies from seeking to access U.S. 
markets or that make it overly burdensome to do business here 
in the United States. Such burdens can deter legitimate 
companies from seeking financing on U.S. capital markets. This 
is a delicate balance to strike.
    As Congress and the Administration weigh whether to create 
new reporting and disclosure requirements and determine how to 
best protect U.S. investors, they should likewise consider the 
use of narrowly-targeted sanctions which offer a well-
established tool to ensure U.S. companies and U.S. national 
security are protected from certain threats.
    The United States has a range of sanctions tools to target 
specific Chinese companies whose activity it believes poses 
national security risks. In particular, over the last few 
years, the United States has deployed limited, but powerful, 
prohibitions on trading in public securities of certain Chinese 
companies allegedly associated with the People's Liberation 
Army, or otherwise alleged to be involved in China's civil 
military fusion program.
    Likewise, for companies or individuals who are alleged to 
engage in particularly egregious actions, this targeted 
approach may be a narrow and effective way to limit these 
companies' or persons' access to U.S. markets and to U.S. 
capital more broadly.
    In addition to sanctions designations, the U.S. Department 
of the Treasury also has effectively promulgated advisories and 
guidance warning the private sector of doing business with 
certain companies or in certain sectors, including in Chinese 
industries. For example, the Treasury Department, along with 
its interagency partners, issued a supply chain advisory 
designed to warn the private sector about the risk of human 
rights abuses and forced labor in Xinjiang.
    These tools could provide a narrow, targeted way to warn 
U.S. companies and investors of the risks of doing business 
with certain Chinese companies or in particular industries, as 
well as limit the ability of those Chinese companies that 
threaten U.S. national security from securing capital on U.S. 
markets.
    I look forward to your questions, and thank you again for 
the opportunity to testify.
    [The prepared statement of Mr. Lorber can be found on page 
68 of the appendix.]
    Chairman Sherman. I want to thank all tof he witnesses for 
their testimony.
    I now recognize the Chair of the Full Committee, Chairwoman 
Waters, for 5 minutes for questions.
    Chairwoman Waters. Thank you very much, Mr. Chairman.
    Ms. Sutter, it is reported that many China-based companies 
desire to be listed on the U.S. stock exchanges not only 
because our markets are large and liquid, but because our stock 
exchanges permit initial public offerings, or IPOs, with 
something called dual class share structures. Dual class 
structures allow elite shareholders, most often company 
founders and executives, to have a disproportionately large 
portion of the company voting power.
    This structure has been used by many companies from 
Mainland China. In fact, at least 5 of the top 10 U.S.-listed 
China-based companies have dual class structures. What I find 
interesting is that China's own exchanges, or the London Stock 
Exchange, for example, ban the practice of dual class 
structures for IPOs.
    Ms. Sutter, how does the dual class share structure 
permitted by our stock exchanges create risk to our investors? 
Why do China-based companies make use of this structure? Should 
our exchanges limit China-based companies' ability to offer 
dual class share structures?
    I find this situation very interesting, and I question 
whether or not we can question China, when we use the same 
structures? And if we are questioning them because, as I am 
told, China has more control over these big business, these 
owners, these top business people, and they direct them and 
they can tell them what to do, and somehow that is a difference 
between what they do and what we do, can you help me out with 
this discussion?
    Ms. Sutter. Sure. Chairwoman Waters, thank you very much 
for the question.
    I think with the dual class share issue, generally there 
are broader considerations that I do not focus on. I will 
narrow in on the China element in particular.
    As you mentioned, the Chinese companies do take advantage. 
They do use the dual class share structure. This has also 
become a competitive issue within China. Since 2018, the Hong 
Kong exchange, and then, starting in 2019, the China exchanges 
have started to consider and adopt this dual structure.
    The one thing I would highlight in considering how the 
Chinese companies may use this structure is that in addition to 
this legal element, this formal element of dual class shares, 
that within the Chinese system itself, not all shareholders are 
equal. I would highlight to you that in looking at the 
government restructuring of companies like the property 
developer Evergrande, or the restructuring of companies like 
HNA Group, at the end of the day, the government is also often 
a shareholder or has a direct economic interest in a lot of 
these companies. It does not always play kind of a 
disinterested role, shall we say, and so I think it is 
important that even if the dual class share issue were to be 
resolved, that underlying this structure are these inherent 
asymmetries in the role of the state in a lot of Chinese 
companies.
    In the case of HNA, basically what they determined is that 
although there were 300 or more subsidiaries that had been 
created for the company, at the end, the Chinese government was 
the actual controlling shareholder.
    Chairwoman Waters. Do you think that dual class share 
structures are basically good for us, as opposed to China, and 
that we should support what we do because somehow it advantages 
our economy in some way or it advantages the way that we treat 
investors? Do you think it is good?
    Ms. Sutter. I don't have a specific opinion on the 
structure itself. I think the main point I would emphasize is 
that in addition to the formal structure, there is an informal 
structure in Chinese companies that, regardless of how they 
list, this influence of the state and actual controlling 
shareholders and ultimate beneficiaries is embedded within the 
corporate system, either formally or informally, separate from 
even how they list in China or then how they might list on a 
foreign market such as the United States.
    Chairwoman Waters. Thank you very much.
    Mr. Chairman, I am going to yield back my time, but I think 
this is an issue that needs a lot more discussion. I yield 
back.
    Chairman Sherman. I couldn't agree with you more.
    And I now recognize the ranking member of the subcommittee, 
Mr. Huizenga, for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Before I get into my time, I do have a parliamentary 
inquiry. It is the Minority's belief that the inclusion of this 
list that your staff had sent over to us of three bills that do 
not even have bill numbers at this point actually doesn't 
qualify as congressional testimony. It is not properly noticed 
for us, and frankly, even more important, not properly noticed 
to the public and those affected by that.
    I guess I would just note that these bills were not 
properly noticed because, at least at this point, it looks like 
they don't even have bill numbers, and do you then intend to 
have an actual hearing on these bills?
    Chairman Sherman. It is the practice of the committee to 
circulate discussion drafts. Of course, discussion drafts do 
not have bill numbers. Some of the most important legislation, 
I believe, has been discussed as drafts without H.R. numbers.
    Discussion drafts of bills at today's hearings do satisfy 
the McGovern Rule, which requires that a bill has a legislative 
hearing before it goes to the Floor. That being said, it is my 
expectation that either the full committee or more likely the 
subcommittee will have a more general hearing on capital 
markets issues, which will provide a second opportunity to 
discuss these bills before they go to the Floor.
    Mr. Huizenga. Furthering my parliamentary inquiry, the 
rules do state a 3-day notice. That was not what happened, just 
so we are clear, and all on the same page with that. So, at 
this point, I guess I would like to--unless you have something 
more to add on the parliamentary inquiry, I am happy to take my 
time for the questioning now.
    Chairman Sherman. You are recognized.
    Mr. Huizenga. Thank you.
    Mr. Lorber and others, you have made some interesting notes 
on what has been happening with China. Obviously, we have seen 
large tech companies like DiDi and Ant Group, Chinese companies 
that either have or were planning to go public in the U.S., 
have been targeted by Beijing. It is clear that China believes 
it is ready to directly compete with U.S. markets for the title 
of premier global economy.
    What I am curious about is your take on how serious is the 
CCP at all on this crackdown, and are we looking at kind of a 
financial version of Tiananmen Square here with their 
entrepreneurs and their folks that have been innovative? And 
along those lines, what can we do here in the U.S. to improve 
the market situation to make sure that we are competitive?
    I don't want to be Gulliver among the Lilliputians, with a 
whole bunch of other people who have terrible policy and we 
have slightly better policy. I want to have the gold standard, 
the U.S. dollar gold standard of policy here in the U.S. to 
make sure that we are the leading economic force.
    Mr. Lorber. Thank you, Ranking Member Huizenga.
    I agree with your assessment and the assessment of other 
members of this panel when they suggest that you have seen a 
tightening of control over certain companies within China, and 
it appears to be led in part by the government or in full by 
the government.
    But I want to focus on the second part of your question 
because I think that is exactly right. Ensuring that the U.S. 
capital markets space remains robust has all types of 
downstream economic, positive economic impacts for the United 
States. It increases innovation. It ensures that the cost of 
borrowing here in the United States is low. It incentivizes 
non-U.S. companies to come and work in the United States. And 
so, I think from sort of a perspective of ensuring that the 
U.S. financial system remains strong, trying to keep our 
financial markets as streamlined and as attractive as possible 
is an incredibly important goal.
    Mr. Huizenga. I am curious, and along those lines, do 
increased mandatory SEC disclosures not related to financial or 
investment risk--I believe this has been a significant part of 
our conversation on the subcommittee, and there was one of 
those that is proposed here today that applies to all U.S.-
listed companies, not just those from China. What does that do 
to encourage U.S. economic growth, or does it discourage it?
    Mr. Lorber. It is a good question. I do think that there is 
a risk of, if requiring nonmaterial disclosures, that the 
burdens and the obligations that are imposed on U.S. and non-
U.S. issuers will certainly create some degree of additional 
compliance obligations and some degree of deterrence for 
companies seeking to find financing on U.S. markets. So, I do 
think that there is a risk in particular of requiring, again, 
disclosure related to nonmaterial information.
    Mr. Huizenga. Ms. Ross, in your introductory materials and 
biography and those types of things, you talk about materiality 
of disclosure. I am curious if you could very quickly touch on 
that as well?
    Ms. Ross. Thank you so much, Ranking Member Huizenga.
    Yes, I agree. With respect to these issues with China, it 
is really not a matter of needing more new disclosures. The 
problem is that these China-based companies are not even 
complying with our existing rules. So, I don't think adding new 
disclosures will address it. I think what we need to do is to 
actually enforce the existing rules and send the signal to 
Chinese companies and the Chinese government that these are 
rules that pertain to our markets that they must adhere to when 
they are in our markets.
    Mr. Huizenga. What about a targeted sanction or something 
along those lines to address the weaker situation, would you 
view that more effective versus a blanket sort of SEC? Quickly, 
if you want to answer that, and then I want to get to Mr. 
Lorber.
    Ms. Ross. Yes, sure. I agree with Mr. Lorber's testimony 
that targeted sanctions can be very effective tools. I also 
think when we are talking about these China-based companies 
that are listed in the U.S. markets, across-the-board they are 
not complying with our rules. So, I do think across-the-board 
enforcement of our rules against all of them is appropriate.
    Mr. Huizenga. Mr. Lorber, enforcement, quickly, in my last 
seconds.
    Mr. Lorber. Yes, I agree with the assessment of sanctions. 
I think you saw--particularly in the Xinjiang region, you saw 
the designation in 2020, I believe, of the XPCC, the Chinese 
paramilitary organization that was involved or alleged to be 
involved in those activities, as well as the publishing of 
guidance to warn about the supply chain, and I think that had a 
major impact on sourcing of goods, in particular from that 
area.
    Mr. Huizenga. My time has expired, but I just do want to 
commend the Chair. I am glad we are having this conversation. 
This is a conversation we need to have. We have had it in the 
past, but I think the seriousness of this issue has become more 
crystal clear for everyone, and I am encouraged to have this 
ongoing conversation.
    I yield back.
    Chairman Sherman. The gentleman has gone over time, but if 
he wishes more time to praise the Chair, he will be yielded it.
    Mr. Huizenga. The gentleman is obviously a good-looking, 
wealthy, serious-minded person who is--keep going? Okay. I 
think I--
    Chairman Sherman. The gentleman's time has expired. I now 
recognize myself for 5 minutes.
    Ms. Sutter, I want to pick up on your comment about 
selective access, because this is one way in which China has so 
much power here in the United States. I represent the movie 
industry in my district, and they only allow 40 movies into 
China, so if you run a studio, you want to be one of those 40 
movies. And you know that if you make a movie about Tibet, that 
movie isn't getting into China. And you know if you make a 
movie about Tibet, none of your movies are getting into China.
    If you are Morgan Stanley, and you want to do banking in 
China, you know that you may be one of the banks that gets into 
China if your global index includes Chinese companies to a 
sufficient degree, and if you officially notify all of your 
customers that they should include China to the 15-percent 
level or whatever level in their portfolios.
    You know that you will be allowed to do business in China 
if your lobbyist is here on the Hill lobbying for China. China 
doesn't need to hire a lobbyist. They have all of them through 
this selective access system.
    I want to thank Ms. Ross for focusing on the importance of 
the already-passed Holding Foreign Companies Accountable Act, 
and the need for us to pass the officially, definitely, 
explicitly-noticed Accelerating Holding Foreign Companies 
Accountable Act that is pending before this committee, and 
point out that the original bill passed the Senate in light of 
Luckin Coffee and that it was so--and people wonder, is there a 
benefit to short-selling? There is at least one, and that is 
short-sellers, in this case Muddy Waters, LLC, that focused on 
Luckin Coffee, and discovered the problem there, that there was 
$300 million of fraudulent sales. They brought that to their 
attention. They, of course, made money by discovering that, and 
that short-selling can be a way to discover those issues.
    Ms. Chu, I want to thank you for pointing out to us clearly 
that when you invest--we in the United States grow up with this 
idea that you buy a share in a company that owns assets. Those 
assets are managed in the interest of shareholders by a board 
of directors loyal to the shareholders, and those assets are 
controlled by the corporation, and their property interests are 
protected by the courts. That is 300 years, 400 years of common 
law. We just assume that. oh, that is what a corporate share 
is.
    Whereas in China, the board may or may not be loyal to 
shareholders, may be more loyal to the goals of the Chinese 
Communist Party, and the courts may or may not enforce the 
property rights of the corporation vis-a-vis expropriation or 
arbitrary punishment or seizure. And yet, I don't think 
Americans instinctively--they just look at earnings per share 
and say oh, that company is doing well, it must be a good 
investment.
    Ms. Sutter, I want to focus on including VIEs in indexes 
and the deceptive name. If I wanted to raise some money, I 
would call my company, ``GameStopped.'' I would add an, ``E-
D.'' It is a hot company. A lot of people like GameStop.
    You can call a company, ``Alibaba of Cayman Islands,'' and 
register shares here, and everybody thinks that is, ``Alibaba 
of China.'' But what you are really buying is a Cayman Islands 
company that owns a Chinese company that has some sort of 
contractual relationship with Alibaba. Everybody in China has a 
contract with Alibaba, if you have them on your phone.
    Should we allow these phony names--should we allow people 
to use the name Alibaba if they are not Alibaba, and should we 
allow people to say that you are in an index because you are a 
big company when you are really just a Cayman Islands shell?
    Ms. Sutter. Thank you for the question. Would you like me 
to answer--
    Chairman Sherman. Yes.
    Ms. Sutter. Okay, I just wanted to be sure. It is 
interesting, when you read a Chinese company disclosure that is 
submitted to the SEC, they often will talk about the VIE 
structure and risks associated with the VIE structure, 
sometimes going on for 5 or 10 pages, and it is an interesting 
question about, is, ``Baidu, Inc.,'' ``Baidu,'' or is, ``China 
Mobile, Inc.,'' ``China Mobile,'' in the sense of how the 
company is advertising to investor? So, that is an interesting 
question to consider. I think the other--
    Chairman Sherman. I am going to have to ask you to respond 
for the record. My time has expired. It is my fault, but I have 
to go on to the next questioner.
    Ms. Sutter. Okay.
    Chairman Sherman. I now recognize the gentlewoman from 
Missouri, Mrs. Wagner.
    Mrs. Wagner. Thank you, Mr. Chairman, and on that point, I 
think maybe that is why we have copyright laws, and perhaps it 
is up to the private entity and the company to exercise their 
copyright laws.
    Mr. Chairman, I think today's hearing topic is extremely 
timely and necessary. America faces continued health challenges 
and an economic crisis that was brought on by the Chinese 
government suppressing, misrepresenting, and falsifying 
information concerning the spread of COVID-19 in the beginning 
of 2020. We must hold China accountable for their actions, 
which is why I have introduced H.R. 3882, the Compensation for 
Americans Act.
    I also have authored an essay with Representative Andy 
Barr, whom I know will be speaking on this topic later on, 
which outlines the need to strengthen the U.S. sanctions 
regime, which is a key tool to denying our adversaries the 
resources they need to continue their illicit behavior.
    The increased mandatory risk disclosures being discussed 
today will not change China's behavior. Instead, we should be 
focusing on how to better use a more targeted tool, such as 
sanctions or export controls.
    Mr. Lorber, America's ability to counter China's global 
dominance is only effective if we focus on our strengths and 
leverage America's economic might to counter malign Chinese 
activities. As has been discussed today, using our securities 
disclosures to advance foreign policy goals can be 
counterproductive.
    Specifically, I think adding excessive reporting and 
compliance burdens not based on information that is material to 
investors' investment risk calculus typically undercuts 
companies' ability to expand, innovate, and generate jobs. Will 
you describe, sir, how the use of U.S. investment disclosures 
rules to accomplish certain policy goals compromises the 
strength and credibility of America's capital markets?
    Mr. Lorber. Thank you for the question, Representative 
Wagner. It is a good one.
    I think to a certain extent, if there are additional 
nonmaterial reporting requirements put into place for 
companies, it will, as I mentioned earlier in the conversation, 
potentially reduce companies' willingness to list--companies 
that want to list on U.S. financial markets or to access U.S. 
financial markets to seek that access. So, I do think there can 
be a direct impact on the competitiveness of those markets if 
there are nonmaterial reporting requirements and obligations 
that are put into place.
    Mrs. Wagner. Will you comment, sir, also, on why the 
strength of the U.S. economy and our capital markets is key to 
our effectiveness abroad?
    Mr. Lorber. Absolutely. As we were talking about earlier, 
and as I believe Ms. Ross mentioned in her testimony, U.S. 
capital markets are something of a crown jewel of the U.S. 
economy, right? They allow for low-cost capital to be accessed. 
They are attractive for companies that are abroad. They 
increase innovation here in the United States. They bolster our 
economy here.
    And so, I think that to a certain extent, especially when 
viewed vis-a-vis the sort of control that the Chinese 
government is now exercising over its companies and some of the 
crackdowns that we have seen, those markets are increasingly 
attractive, and I think we should do everything we can to 
bolster them.
    Mrs. Wagner. Mr. Lorber, the Holding Foreign Companies 
Accountable Act was enacted last year because the Chinese 
government has actively not allowed Chinese companies listed on 
U.S. exchanges to comply with our securities laws. Is it just 
naive to think that Chinese companies will comply with the 
Democrats' mandatory SEC disclosure discussion drafts proposed 
today?
    Mr. Lorber. I do think that additional disclosure 
requirements may not be impactful in compelling Chinese 
companies to comply. That is why, with the Holding Foreign 
Companies Accountable Act, the 3-year cutoff enforcement 
mechanism, I think is an appropriate mechanism, and for those 
companies that the U.S. believes pose serious national security 
threats, so maybe not just misleading on their financials but 
are actually involved in, for example, the Chinese civil 
military program, I think targeted securities sanctions would 
make sense for policymakers--
    Mrs. Wagner. In my limited time, how do other tools like 
sanctions and export controls eliminate the question of whether 
or not our rules will be, in fact, followed by the Chinese 
Communist Party?
    Mr. Lorber. It is a great question. I think sanctions are a 
natural tool that have been employed by both of the last two 
Administrations, the Trump Administration and the Biden 
Administration, to target companies that the U.S. Government 
believes pose a national security threat. And in addition to 
that, one other thing I would say is guidance. The Treasury and 
other interagency partners have been really, really good in the 
last few years about putting out informative guidance to 
private sector actors to warn them of sanctions in illicit 
activity risks, and those companies that have read that 
guidance take that into account when making risk-based 
decisions.
    Mrs. Wagner. Thank you, Mr. Lorber. My time has expired. I 
yield back.
    Chairman Sherman. I now recognize the gentleman from 
Georgia, Mr. Scott, who is also the Chair of the House 
Agriculture Committee, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    This is an extraordinarily important hearing. Right now, 
China's role in the global economy is just massive. China is 
the largest exporter of goods in the world, with 9.6 percent of 
the entire global share, and while the country's GDP grew at 
its slowest pace last quarter, expanding just 4.9 percent from 
the previous year, China's $15 trillion economy remains the 
second-largest in the world, second to us in the United States. 
Ours is number one.
    In your testimony, Ms. Sutter, you cite several factors 
regarding China's attempt to reduce debt and curtail market 
risk among several large firms. Here is the question for you 
that I think the nation and the world is waiting on: Can you 
explain what the impact would be for not just us, but for all 
of the global markets if a Chinese economic collapse were to 
occur?
    Ms. Sutter. Thank you, Congressman, for the question.
    I think there is a lot of attention right now on the 
situation of China's second-largest property developer, 
Evergrande. Their total debt is about 2 percent of China's 
national debt. I think it provides some insight into some 
overcapacity and China's continued dependence on fixed asset 
investment for growth, that this is a systemic weakness in the 
economy.
    A lot of people argue that right now, the U.S.'s potential 
risk exposure is manageable, but we are looking at a situation 
where a lot of financial firms now having new licenses to move 
into China--it has been discussed, putting more Chinese 
companies into fund indices--what comes ahead. So, I think 
Evergrande is a case study to look at the potential systemic 
risks in the market, how U.S. exposure could grow over time, 
and what would be the U.S. recourse in these types of 
situations.
    Mr. Scott. Let me ask you this. How exactly is the dramatic 
slowdown in Chinese construction projects and manufacturing, 
those two things, how are they related to the growing warning 
signs that we are getting of a possible shock to the global 
financial markets?
    Ms. Sutter. I would say in response, I think the main thing 
to keep in mind is the trouble that Evergrande and other 
property developers have in China arguably was started by the 
Chinese government. These are highly-leveraged companies. 
Evergrande's assets, 60 percent are unbuilt, unsold properties, 
and these companies rely on money to continue to flow so that 
they can continue to pay. So, when the government stops the 
ability for new fundraising, it creates crisis in the system.
    I think what you see the Chinese government doing now is 
trying to avoid market contagion in property, the market more 
broadly, but they are also trying to avoid moral hazard. They 
don't want to signal to companies like Evergrande that they can 
continue business as usual.
    The local government in China is very dependent on these 
property developers for income for local government mandates. 
So there is a symbiotic relationship. In the case of 
Evergrande, the Xinjiang government is a direct shareholder in 
Evergrande.
    So, I think it is the interrelationship, it is a challenge 
for China to get out of this situation, and I would say the 
situation for the United States is less our current exposure, 
it is more about we seem to be at a juncture where there is a 
lot of discussion about increasing financial exposure in areas 
like this in the economy. What would that look like going 
forward?
    Most people seem to think the current exposure, if the 
Chinese are able to handle the situation, is fairly contained 
at this point, although that depends on how the Chinese 
government handles it going forward. It is an issue-to-watch 
type of scenario right now.
    Mr. Scott. Thank you very much. That was very good 
information. Thank you.
    Chairman Sherman. Thank you. I now recognize the gentleman 
from Arkansas, Mr. Hill.
    Mr. Hill. I thank the chairman, and I appreciate your work 
in preparation of this hearing. It is certainly a topic of 
interest, strong interest to Members of both parties, and I 
appreciate our witnesses' preparation and being here 
personally. It is good to see witnesses in person, Mr. 
Chairman, and not on a Zoom screen.
    In the late 1980s, I spent a lot of time traveling in Asia, 
including in China, and I can remember distinctly John Phelan's 
famous trip to Beijing in 1986 trumpeting the New York Stock 
Exchange as a potential place for Chinese companies to list. 
Americans had seen the success of the Asian Tigers by the 
1980s, and I think U.S. policymakers really believed that if we 
demonstrated and modeled good behavior and opened up our 
markets, capital markets to China, that we would get a good 
response.
    And in fact, China's capital markets did grow, access to 
capital was there, and there is no doubt that free markets and 
capitalism and the open trading system allowed China to create 
hundreds of millions of people and move them into the middle 
class, and certainly, China has benefitted from this past 3 
decades.
    But that 30 years of progress from the open door is now 
seeing that door slam shut since President Xi has turned his 
country into a more authoritarian state, and turned his back on 
the norms in capital markets. Consumers are no longer 
benefiting, but they are now pawns in a surveillance state. The 
business sector is no longer benefiting as much because markets 
are volatile, rules are inconsistent, and the state demands 
full control of entrepreneurship.
     I don't know if investors are benefiting or not. I think 
the purpose of this hearing is to demonstrate that maybe they 
are not, because they are not getting the kind of information 
that a good market like the American markets provides. The 
third world and emerging markets are not benefiting due to the 
predatory neocolonial belt-and-road policies of China, and 
finally, their attitude about the capital markets would make 
the founders of Enron blush.
    So, I want to say thank you to our ranking member and our 
chairman for calling this hearing.
    I want to start with Ms. Sutter. You have provided 
excellent testimony. You brought a lot of good information to 
the committee on the VIE structure, and also using an ADR 
structure, which we have done for years and years successfully 
in many markets, we have allowed liquidity for foreign 
companies. Tell me what you think we ought to do that is fair-
minded, and that is compliant with WTO obligations on improving 
disclosure for the use of a VIE or even the ADR structure.
    Ms. Sutter. Congressman, thank you for the question.
    There has been a lot of interest around the challenges the 
United States faces with China, not just in this area, but 
across-the-board, and an interest in looking at greater 
transparency. There are a couple of ideas that I hear discussed 
that may be of interest for consideration for you and the 
committee: the issue of requiring a 20-F or 10-K equivalent for 
all firms, not just those who list, but also those who have 
secondary listings; the issue of more detail on the corporate 
structure; all of the beneficial owners, all of the different 
contracts and ties across the owners is another area that some 
have discussed; the issue of quarterly as opposed to only 
annual reports on a company's financial situation--
    Mr. Hill. Let me interrupt you there. Do you think if that 
were the status, it would make America a less effective market, 
say, for American depository receipts, or would you think--not 
just China, but as a general matter, would that be something 
that would be met with appropriately, since companies want 
access to U.S. retail investors?
    Ms. Sutter. I would say that I believe the issues I just 
raised are the same for what a U.S. lister would have to do--
    Mr. Hill. Right. Thank you for that.
    Ms. Sutter. Sure.
    Mr. Hill. Now, let me turn to Ms. Chu. You made, again, an 
excellent presentation. You commented on SEC Commissioner 
Hester Peirce's speech where she was open to additional 
disclosure for index providers and exchange-traded funds 
(ETFs). Tell me what you think would be appropriate there?
    Ms. Chu. Thank you for the question.
    At present, the criteria used by index providers who, 
again, exert overwhelming power over where U.S. investors are 
able to invest in China, which companies have access to U.S. 
capital, the criteria that they use is based on market factors. 
They have no consideration for reputational risks like human 
rights or national security, sanctions regimes, or trade 
conflict, and these are all things that pertain--
    Mr. Hill. Thank you. If you would, submit for me your 
additional thoughts on that to the record.
    Mr. Chairman, I yield back to you.
    Ms. Chu. Okay.
    Chairman Sherman. The gentleman from Connecticut, Mr. 
Himes, who is also the Chair of our Subcommittee on National 
Security, International Development and Monetary Policy, is 
recognized for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman, and a big thank you to 
our witnesses for really compelling and interesting testimony.
    I want to use my 5 minutes to really zero in on the China 
issue here. Look, there is a long list of things that concern 
us all about China that have to do with strategy and 
geopolitics and military and IP theft, and it goes on and on 
and on. But this is the Financial Services Committee, and I am 
not a priori persuaded that variable capital arrangements are 
inherently problematic. Lots of U.S. companies, as the 
chairwoman points out, use variable capital structures. We are 
hearing about Luckin Coffee. I had never heard of Luckin 
Coffee, but dodgy accounting leading to bankruptcy is hardly a 
uniquely Chinese problem.
    Let me start with you, Ms. Ross, because you did 
enforcement. If I am wrong about that variable capital or 
particular intensity of bankrupt companies in China, I would be 
interested to know, but I am sensing that there is an 
allegation floating around that perhaps the Chinese are getting 
special treatment in the face of the sanction mechanisms that 
the markets already have. In other words, hundreds of companies 
are delisted every couple of years. The specific question is, 
are the Chinese somehow getting special treatment with respect 
to bad behavior not leading to delisting? And more generally 
speaking, what is the narrowly Chinese issue within capital 
markets, or are they more broad capital markets issues that we 
should be focused on?
    Ms. Ross. Thank you for that question, Congressman Himes.
    I think there is an uniquely Chinese issue here, which is 
that we have investor protections in this country that require 
inspections of audits of companies that are listed here. These 
protections are known to have economic benefits both for our 
markets, our investors, and the companies that are listed here.
    Almost all non-U.S. companies that are listed here are 
subject to and cooperating with those protections, and the 
jurisdictions that they are in are cooperating in those 
protections. The People's Republic of China (PRC) is the sole 
jurisdiction in the world that is blocking that investor 
protection. So in that respect, companies from Mainland China 
and Hong Kong that are listed here are getting a different deal 
than all other companies both in the U.S. and non-U.S. 
jurisdictions. That is what needs to be fixed, and that is why 
I commend your Holding Foreign Companies Accountable Act.
    Mr. Himes. And what is the right way to address that? There 
are well-established pathways--SEC action, private rights of 
action, delisting. What is the right way to address that?
    Ms. Ross. Right. You have mentioned delisting. That is the 
pathway that is embodied in the Holding Foreign Companies 
Accountable Act. What you have done is put forward a very 
straightforward and orderly process for managing these 
companies if they don't come into compliance within the next 3 
years, and if you enact the Accelerating Holding Foreign 
Companies Accountable Act, that will be 2 years. You have given 
ample time for companies and for the Chinese government to 
understand what the pathway is, and we are already seeing 
investors in markets and even the Chinese government taking 
that seriously.
    Mr. Himes. And what about the exchanges, who ultimately 
would do the delisting, are they particularly hesitant to take 
this up with Chinese issuers?
    Ms. Ross. In this case, it is actually the SEC that would 
issue orders prohibiting trading in these companies, and that 
is a very standard procedure, as you have mentioned.
    Mr. Himes. Okay. And so, again, trying to get at the 
uniquely Chinese problem here, this is not an unusual action 
for the SEC. Is the SEC somehow--has it been hesitant to take 
this action with respect to Chinese companies, or should this 
committee be tightening up across-the-board SEC enforcement 
against failure to be sufficiently transparent?
    Ms. Ross. Great question. These are traditional tools the 
SEC uses, which is why I think they are going to be very useful 
in this case. What is unique about this situation is that the 
PRC has resisted inspections of audits of all China-based 
companies that are listed here. That is a unique situation. You 
have designed this act to take advantage of longstanding, well-
understood SEC processes to address it.
    Mr. Himes. And just in my remaining moments, I was actually 
interested to learn that, I guess, the London Stock Exchange 
prohibits variable capital companies. Is that an idea that 
would have support amongst these witnesses for adoption here in 
the United States?
    Ms. Ross. I do think there are risks associated with 
variable interest enterprises. I think that they are very 
opaque. I do not think that the average investor understands 
that when they are investing in a VIE, a listed company that is 
based on a VIE, they are not investing in the operating company 
that is based in China. They have no voting rights, and they 
have no say over what management does and no rights to 
information. That is very different from most U.S.-listed 
companies, and I think that presents very big risks to 
investors.
    Mr. Himes. Thank you. My time has expired.
    Chairman Sherman. The gentleman from Ohio, Mr. Davidson, is 
now recognized.
    Mr. Davidson. I thank the chairman, and I thank our 
witnesses. And I appreciate your testimony, both written and 
oral.
    And Ms. Ross, I just want to say thanks for your dialogue 
there with Mr. Himes. I think you did a great job of 
highlighting the specific problems where China really is 
getting a different set of rules, and the disclosure regime, 
and hopefully, how legislation passed here could change that 
and apply an evenhanded set of policies that are already in the 
standard toolkit for the SEC. I hope we see some real results 
towards that. So, thank you for your dialogue.
    I am concerned about the Office of Foreign Assets Control 
(OFAC). Frankly, we have done a lot of sanctioning since 1975 
when this law was applied, and I am also concerned about China 
and, frankly, the conflation of market risk, which our 
committee dealt with and Ms. Ross highlighted really well, with 
policies that are really foreign policy, for example, the 
treatment of Uyghurs.
    And Mr. Lorber, I in particular just want to know how 
effective has OFAC been at identifying and addressing national 
security risks, and is OFAC a more appropriate way to deal with 
China's human rights abuses than the Securities and Exchange 
Commission, for example?
    Mr. Lorber. Thank you, Representative Davidson. It is a 
great question.
    I will say that OFAC has been particularly effective both 
generally, but also specifically related to human rights. After 
the passage by Congress of the Global Magnitsky Act and the 
implementation of that Act in December 2017, the Treasury 
Department and OFAC have targeted a wide range of human rights 
abusers and oftentimes caused them to lose hundreds of millions 
of dollars in assets. So, there has been a real impact that 
OFAC has achieved with the use of human rights-related 
sanctions.
    I do think that to your second question of whether or not 
OFAC should be, for example, the body that goes after human 
rights abusers versus something like the SEC, I do think OFAC 
has expertise and the Treasury Department, more generally, has 
expertise. They have an intelligence collection function, for 
example, that allows them to identify and successfully target 
human rights abusers.
    Mr. Davidson. Yes, thank you. And frankly, it is a national 
security problem dealt with by America's Government with the 
people with the toolkit and the intelligence to do it, and the 
passive approach is to say, well, these publicly traded 
companies are going to do it.
    That is what was done on conflict minerals, for example. 
And at the time, I remember one of the companies had about 30 
employees, and I am filling out forms on conflict minerals when 
I buy steel. A small business in Western Ohio isn't really in a 
position to assess the supply chain risk of steel mills, and so 
everyone just signs off on the form. It is a very passive 
approach versus a very active approach to diplomacy.
    And in general, that has been kind of the challenge, hasn't 
it? With China, America has been a little too passive. We have 
hoped for all of these good things from China, but in spite of 
the fact that we see China's abuse of the World Trade 
Organization (WTO), for example, we haven't forced them to 
honor their existing commitments, and we haven't forced them to 
play by a standard set of rules.
    And that is what I love about the idea that if you want to 
stay listed, you have to be subject to our accounting policies 
just like anybody else, and if you want normal trade relations, 
you have to be compliant with human rights standards around the 
world. I think it is long overdue that we apply that to China.
    Now, inside China, of course China is concerned about their 
own domestic market, and they have lots of attention focused on 
Evergrande, for example. But we are watching a meltdown in 
China that may be similar to a real estate meltdown in the 
United States. They had a massive boom. They have definitely 
inflated asset prices in many of their real estate markets, and 
Evergrande has been at the center of that.
    Ms. Sutter, I just wanted to maybe finish with you. Your 
testimony does an excellent job of laying out the development 
surrounding Evergrande. As you state, about 60 percent of their 
assets are unbuilt and unsold properties, and the firm counts 
loan interest payments as assets. This has empowered Evergrande 
to become shockingly leveraged, and now Evergrande owns about 
$305 billion in debt, 2 percent of China's GDP.
    We have already seen developments where Evergrande has 
failed to repay some of its obligations. However, there hasn't 
been contagion effects we would expect when an entity of this 
size goes into default. Why do you believe that is? Is China 
actually subsidizing it directly, or do you anticipate things 
by the People's Bank of China to deal with it?
    Ms. Sutter. Congressman, thank you for your question.
    I think the government is directly involved in 
restructuring Evergrande. They have set up a committee, and it 
is very similar to what they have done with other companies 
that have gotten into financial trouble--Anbang, HNA, Fosun--
and I think what they are trying to do is discipline the 
company while not having contagion in the broader markets, 
property market and broader markets. And so, I think it is a 
little bit of push-pull--
    Mr. Davidson. Thank you, and--
    Chairman Sherman. Thank you.
    Mr. Davidson. --if we can follow up in writing, my time has 
expired, and I appreciate the chairman.
    Chairman Sherman. The gentleman from Illinois, Mr. Foster, 
who is also the Chair of our Task Force on Artificial 
Intelligence, is now recognized for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman, and thank you to our 
witnesses.
    There are three functions of our capital markets--to 
allocate capital, to do so efficiently, and to control risk--
and the opacity of Chinese financial products puts at risk all 
three functions.
    American capital markets are the premier venue for issuers 
due to our deep liquidity and broad investor base, both of 
which are substantially the products of the high information 
transparency established by our regulatory regime. Essentially, 
here, more than anywhere else, you know what you are buying 
into. We must uphold these standards, and there should be 
consequences for not complying with transparency measures, 
which is why I was a proud co-sponsor of Chairman Sherman's 
Holding Foreign Companies Accountable Act, and I look forward 
to further bipartisan action on this front.
    Now, when we take action, one key question is whether the 
U.S. should act unilaterally, bilaterally, or multilaterally. 
If we unilaterally start delisting China-based companies, per 
the Holding Foreign Companies Accountable Act implementation, 
do we risk triggering a regulatory race to the bottom where the 
delisted companies would just relist in London, Germany, 
Singapore, Hong Kong, or even dodgier locations? Or are we 
better off acting multilaterally, very much like President 
Biden's recent successful negotiation of global minimum 
corporate tax rates?
    And so my question is, I guess, to all of our witnesses, is 
there any significant discussion of multilateral agreements on 
minimum transparency standards for listed companies, and if so, 
what are the venues in which these are discussed, at least 
among the free democracies of the world?
    Ms. Sutter, do you want to take a swing at it?
    Ms. Sutter. Sure. Thank you, Congressman, for the question.
    There is competition among exchanges, and that is a 
consideration about when one market takes moves, how companies 
shift potentially to another. I would mention that under 
China's leader, Xi Jinping, there has been a big push for 
Chinese companies to come home to list either on Hong Kong and 
China, either as their only listing or as a dual listing.
    One issue for consideration could be to look at U.S. 
standards with like-minded, open, transparent markets that lean 
on the rule of law in the sense that we do and to compare those 
standards--
    Mr. Foster. My question is, what are the venues at which 
those might be discussed or could be being discussed now? Are 
there groups that are looking into this sort of thing?
    Ms. Ross, did you want to--
    Ms. Ross. I agree with Ms. Sutter's description of this 
situation, particularly in China, that the Chinese government 
is actually pulling the companies home. But to your question, 
Congressman, the SEC is a very active member in the 
international organization of securities regulators known as 
the International Organization of Securities Commissions 
(IOSCO). IOSCO includes almost all major securities regulators 
around the world, and has many committees that develop all 
kinds of model rules, model legislation, and share information. 
That has proven to be a very proactive and successful forum to 
raise standards across-the-board and address some of these 
risks that you are talking about, for example, a race to the 
bottom.
    Mr. Foster. Yes, is China a member of this? And what would 
be their reaction if we raised standards that would effectively 
delist their companies in the United States? Would they insist 
on letting those lower standards still apply in China?
    Ms. Ross. None of the members of IOSCO are obligated to 
follow the requirements of IOSCO. IOSCO is really a body to 
share and develop best practices, and the members then have--
    Mr. Foster. They pick and choose, right?
    Ms. Ross. They pick and choose, but it is still a very good 
forum to--
    Mr. Foster. To discuss, and there would have to be a 
separate new group that said, okay, we are all going to agree 
to common standards to avoid this sort of regulatory race to 
the bottom.
    Ms. Ross. If you wanted to do that, yes.
    Mr. Foster. Yes. Ms. Chu?
    Ms. Chu. I would just like to jump in to note that the EU 
recently enacted a regulatory framework for index providers. I 
think that is the first time they have done anything of the 
sort, and I would encourage the United States to consider 
enacting similar legislation, similar regulatory policy, or to 
seek out commonality.
    Mr. Foster. Mr. Lorber, any comments, sir?
    Mr. Lorber. I don't have information on whether or not 
there is a multilateral body to prevent the sort of regulatory 
arbitrage that you are mentioning. I will say I do think at a 
high level while, honestly, regulatory arbitrage of this nature 
would be a potential issue and a concern, there would be 
certain companies that I think pose national security risks 
that even if they were to say we are going to go to another 
exchange, we would want to prevent them from accessing U.S. 
capital markets in any event.
    Mr. Foster. Understood. I will yield back.
    Chairman Sherman. Mr. Hollingsworth is now recognized for 5 
minutes.
    Mr. Hollingsworth. I am excited to be here and I appreciate 
all of the testimony that has been given thus far throughout 
the course of this hearing. There are a lot of issues on the 
table, and in this constellation of issues before us, I wanted 
to break a few things apart and better understand both the aims 
which we are trying to accomplish and the means by which we 
might get there.
    It seems in my conversations with colleagues on my side of 
the aisle and colleagues across the aisle as well, that there 
are a couple of different things that are being talked about.
    Number one, there is deep concern that China may be 
appropriating technology from U.S. private firms, and certainly 
from the U.S. Government as well, for use in its own design.
    Number two, there is some concern about protecting U.S. 
investors from Chinese companies that may list here but, in 
fact, not be engaged in the business practices that they say 
they are or not be audited in the manner in which we believe 
they should be.
    Number three, there are some concerns that firms that might 
be gaining the advantage of U.S. capital are deploying that in 
unethical ways--Uyghurs, for example--that probably isn't 
specific to China, but around the world, no matter where it may 
be and what its geography may be, of which we would disapprove.
    Number four, there is also this lingering sense that is 
hard for me to shake that perhaps we are just out to deprive 
Chinese companies of U.S. capital, period, instead of U.S. 
technology. And I want to make sure that I understand all of 
those different aims so that the mechanisms by which we might 
accomplish that truly get us there.
    Mr. Lorber, I wanted to talk about one of those 
specifically with you, which is the deprivation of 
technological transfer from U.S. firms to Chinese firms that we 
believe may be a threat to our national security, and the means 
we have currently in place in law by which to stop that. Could 
you speak a little bit about that?
    Mr. Lorber. Yes, thanks. It is a great question, 
Representative Hollingsworth, and I like your sort of framing 
it in the bucket system that you have approached us with.
    On the first bucket, which is the concern that China may be 
appropriating technology and what we have in place to prevent 
that, I think there are a couple of different mechanisms that 
exist. One is surely private causes of action. So, this may not 
be a U.S. Government approach, but there are lawsuits that can 
be filed.
    Likewise, there are criminal causes of action, too, that 
the Department of Justice can pursue, and part of this process 
during the last Administration was undertaken with the 
Department of Justice's, I believe the China Espionage Unit was 
the name of it, or something akin to that.
    The second primary body that you can think about when it 
comes to technology theft or concerns about technology 
appropriation could be in the context of the Committee on 
Foreign Investment in the United States (CFIUS), and of course, 
this body's revision of CFIUS with the passage of the Foreign 
Investment Risk Review Modernization Act (FIRRMA) in 2018.
    Mr. Hollingsworth. Right.
    Mr. Lorber. And then, there could also be potential 
targeted sanctions that could be focused on particular Chinese 
companies if the Administration decided to do so--
    Mr. Hollingsworth. Is there a gap today that exists that we 
should solve for in the prevention of that important technology 
transfer?
    Mr. Lorber. I think I would have to go back and take a 
little bit of a deeper look at it. I think one of the concerns 
is that on the private cause of action front, there are 
challenges. I know there have been instances where Chinese 
companies that have been accused of IP theft have employed 
certain legal measures here in the United States, like the 
Foreign Sovereign Immunities Act, as a way to try to prevent 
private litigants from accessing it, and I know there has been 
a major debate about that over the last few years in the legal 
community.
    Mr. Hollingsworth. But much of that work is ex post facto, 
right? The technology transfer has already occurred, and they 
are trying to recoup their losses as a private enterprise or 
private persons, right? Much of our work up here is the 
prevention of that rather than the putting together of Humpty 
Dumpty.
    I wanted to better understand, is there any area where we 
need to do work from a legal standpoint in the prevention of 
technological transfer that threatens our national security?
    Mr. Lorber. I take your point that it is kind of an ex-post 
thing, but I think that even if it is solved for ex-post, it 
could have a deterrent impact moving forward, for example, if 
companies are thinking about stealing U.S. IP and they 
recognize that if they do so, there is a decent chance that not 
only will they get sued, but that they will--
    Mr. Hollingsworth. Yes. Well, that only counts if that suit 
renders a judgment, and that judgment is collected upon, which 
is a real challenge--
    Mr. Lorber. Yes, 100 percent.
    Mr. Hollingsworth. I think what I am trying to make sure I 
understand is, I don't believe that we should solve these 
problems in the financial sector, but I believe we should solve 
them with very vigorous laws that prevent this and real 
penalties in the event those laws are broken. Call the sheriff 
if someone is stealing, don't call the local bank to try to 
prevent them from depositing it in their bank account.
    With that, I will yield back.
    Mr. Casten. [presiding]. Mr. Vargas is now recognized for 5 
minutes.
    Mr. Vargas. Thank you very much, Mr. Chairman.
    Mr. Chairman, I have to say that I think today's hearing 
has been excellent. I agree with most of the things that have 
been said on both sides of the aisle. However, I also think 
that whenever we talk about China, there is a great disconnect 
between what we say and what we do.
    For example, I fully agree with everything that Mr. Hill 
said today. Mr. Hill is a good friend, and I know he has great 
experience in this, and I think he is absolutely right that 
China has become very aggressive, has become an authoritarian 
state, and they collect a whole lot of data that they shouldn't 
be collecting.
    However, at the same time, I am from California, and I can 
tell you that we have ships way out in the ocean now waiting to 
be unloaded. With all of the Chinese products coming to the 
United States, we can't seem to buy enough. It is incredible 
that we say that they cheat, they do all of these things, we 
have a great nation competition, yet at the same time, we don't 
seem to say that, well, we are not going to buy all their 
stuff.
    We do, in fact, do that, whether they come here and they 
cheat, or they treat Uyghurs terribly and abuse them and have 
horrible human rights issues and spy on all of their people. It 
doesn't matter. We still buy their stuff. I try not to. I try 
very hard. But at the same time, it even drives me crazy that 
my iPhone is not manufactured there necessarily, but it is put 
together there.
    We say one thing, and we do another, when it comes to 
China. And I think we have to understand that they are not only 
competing with us, but they are becoming a real threat, and we 
have to do more than what we are doing. That is why I think it 
is very good that we are looking at them frankly, and looking 
at them holistically, and saying, wait a minute, first of all, 
okay, a lot of our companies, as Mr. Sherman said quite well, 
want to be in China because of the market there. I get that. In 
fact, it seems that every time a movie goes there from the 
United States, they make more money in China than they do in 
the United States.
    So, I get that. But at the same time, we have to understand 
that they are not only our competitor, but they cheat. And when 
they want to access our capital markets, they don't want to 
play by our rules. We have to change the rules. We have to go 
after them. I think that is a good thing. But at the same time, 
we don't seem to; we say that we will, but we don't.
    Ms. Ross, they don't play by our rules, so what should we 
do?
    Ms. Ross. Thank you, Congressman, for that question. I 
couldn't agree with you more.
    When the PCAOB was first formed in 2003, the PCAOB--as I 
said in my testimony, the PCAOB undertook the task of reaching 
out to countries around the world who had foreign private 
issuers who were listed in our markets to work out arrangements 
so that we could make sure that the PCAOB could implement its 
own responsibilities in an appropriate way, and that has worked 
out. It has taken many years, but it has worked out in every 
single jurisdiction where we have U.S.-listed foreign private 
issuers based in other countries.
    The sole outlier is the PRC. Mainland China and Hong Kong 
firms are not complying with our rules. We have had ample 
time--many, many years--to resolve these differences, and I 
think that the actions that Congress has taken with the Holding 
Foreign Companies Accountable Act are critical to signaling 
that we have to put a stop to that situation and enforce our 
rules across-the-board with all companies. So, I think that was 
a very positive step that you took.
    Mr. Vargas. Thank you. And again, I just believe we have to 
get more aggressive and understand the situation that we are in 
now.
    Certainly, it is a terrible thing that we had the Cold War, 
but we understood we had a fight at the end of the day, and we 
won. We are in a situation now with China where they are quite 
aggressive all around the world, and even militarily now, when 
they team up with Russia, they surround Japan militarily, they 
are doing things that are very belligerent, and we have to 
understand that and we have to push back.
    I know that our companies want to be there, I know that 
they are a big player, but at the same time, we can't continue 
down this road and think things are going to be okay. So, 
again, I appreciate what everyone has said today. I think that 
there is a great discussion going on, but I also think that 
there are a lot of things that we can do together here, because 
I think both sides see Communist China somewhat the same, not 
completely. I think there is a lot we can do.
    And again, I thank the chairman, and I thank the ranking 
member. And I see that I have 7 seconds left, so I will yield 
back. Thank you.
    Chairman Sherman. I thank my fellow Southern Californian, 
and I now yield 5 minutes to the gentleman from Ohio, Mr. 
Gonzalez, whom, I might add, was the Republican lead on the 
Holding Foreign Companies Accountable Act.
    Mr. Gonzalez of Ohio. Thank you, Chairman Sherman, and 
thank you for your leadership on that important issue. And 
thanks for this hearing, and to our witnesses, I think this is 
a tremendously important topic that, frankly, we are going to 
be dealing with for a very long time.
    I want to start my questions with Ms. Chu. In this 
subcommittee, we often talk about how the U.S. capital markets 
are the envy of the world, and I think that is accurate. And 
there are a lot of reasons for that--the liquidity, the access 
to various different types of investors, et cetera. One 
argument we hear against cracking down on China in a meaningful 
way is that companies and investors will flee, that they will 
go to other jurisdictions, and therefore, we shouldn't do 
anything because we put at risk that incredible U.S. capital 
market structure.
    Ms. Chu, where do you fall on that? And then, what sort of 
steps, if any, do you see China taking in order to replicate 
the U.S. markets and to try to keep Chinese companies from 
listing in the United States?
    Ms. Chu. Thank you for the question.
    On the first point, with regard to Chinese companies 
fleeing the U.S. markets, of course, we have seen a couple of 
companies already leave. There are four--China's four AI 
dragons who are known for surveillance technology. I think at 
least three of the four were planning to IPO in the United 
States as of the end of last year, and after the entity list 
designations, have decided to either go to the Shanghai STAR 
market or to the new Beijing exchange.
    So, yes, that is a possibility, but at the same time, I 
believe that enforcing capital market sanctions and 
restrictions on investment is critical to U.S. foreign policy 
objectives. At the end of the day, incongruent policy is 
ineffective policy.
    When you have a company that has been identified as, for 
example, building missiles in China or building hypersonic 
missiles, and we decided that U.S. companies are not allowed to 
supply them technology or services or knowledge, and then you 
are allowing the U.S. investors to invest in those same 
companies so they can build up those R&D capabilities, that is 
a significant flaw and a significant gap in our ability to 
enforce any sort of policy goal.
    Mr. Gonzalez of Ohio. Thank you. Just to interrupt quickly, 
I couldn't agree more. I think there is sort of a question 
which is, if somebody is on the entity list, and the company is 
designed essentially to give China a competitive advantage 
militarily against the United States, should we really be that 
upset if they decide to list in Shanghai? My view is, no, we 
should not. Thank you for that.
    Mr. Lorber, I want to switch to you. In your testimony, you 
mentioned targeted blocking sanctions against specific 
individuals. What has been the overall effectiveness in these 
situations where the U.S. has targeted specific people?
    Mr. Lorber. Obviously, it depends on the target, but there 
have been many situations in which the targeted blocking 
sanctions that we have employed have been particularly 
impactful. In the example I mentioned earlier, the XPCC, the 
way that OFAC sanctions regulations work is that essentially, 
if you target an entity, anything that entity owns 50 percent 
or more is also, by law, sanctioned. And in the context of the 
XPCC, it actually had I think hundreds of subsidiaries spread 
around the world that were all blocked, so if there was U.S. 
jurisdiction, you couldn't do business with them. So, it 
actually had a major impact on the entity.
    Mr. Gonzalez of Ohio. Great. So, that's definitely 
something to consider going forward.
    Ms. Chu, back to you, I want to talk about DiDi and the 
Chinese government's crackdown, ranging from their security 
overreach into the company and their efforts to exert more 
state control. Is this a sign of a new trend by China, and how 
do you see that trend playing out vis-a-vis the capital 
markets?
    Ms. Chu. I would respond that these are not new trends 
necessarily. The Chinese government has always exercised its 
regulatory apparatus to crack down on social ills, crack down 
on companies posing threats to state control, and also to 
address problems that maybe have been festering under the 
surface of Chinese society for a long time and have just now 
come to a head, and they are forced to take brisk and just 
really strong action, maybe capricious action to address them.
    What has happened is that U.S. investors are now exposed to 
these companies, are increasingly exposed, and are, therefore, 
increasingly exposed to these regulatory risks and crackdowns.
    Mr. Gonzalez of Ohio. Quickly, do you think we need to do 
more from a disclosure standpoint to help U.S. investors 
understand when a DiDi or another Chinese company is 
compromised in various ways as they come public in U.S. 
markets?
    Ms. Chu. Yes, I think that is absolutely necessary, and 
beyond that, I do think that disclosure requirements would 
serve as a deterrence for Chinese companies that are involved 
in serious human rights abuses or national security problems. 
For example, in the Hong Kong Stock Exchange, in I think 2015, 
China Communications Construction Company's dredging entity 
sought to IPO. When they were asked at that point if they were 
involved in South China Sea militarization activities, after a 
period of time they postponed, and I think they ultimately 
withdrew their IPO application, because in the Communist Party 
of China's party-state, you can't disclose, and you are not 
supposed to acknowledge that these are risks.
    Mr. Gonzalez of Ohio. Thank you, Ms. Chu. I will follow up 
directly, and I yield back.
    Chairman Sherman. Thank you.
    I now recognize the gentleman from Illinois, Mr. Casten, 
who has received so many honors in his life, but none more 
important than being Vice Chair of this very subcommittee.
    Mr. Casten. Nothing prouder than being under your 
leadership, Mr. Chairman. Thank you so much, and thanks to all 
of our witnesses.
    Ms. Sutter, I want to start with you and just pick up on 
some things that you had mentioned about Evergrande. The 
headlines, and I think you have said this, their $300 billion 
of debt, potentially a default, 2 percent of China's GDP, 2 
percent of, I guess their debt as well, national debt, real 
estate exposure, maybe 30 percent of Chinese markets. And if I 
am doing the math correctly, 190 Chinese-based companies, $2.4 
trillion of market cap, so maybe 10 percent of the New York 
Stock Exchange (NYSE) is exposed there.
    Maybe that is too much. What do you think is the systemic 
risk to financial markets we should be thinking about if 
Evergrande were to default on their $300 billion? Are those 
about the right metrics? Are we thinking about possibly 10 
percent of the U.S. stock market exposed? Is it bigger? Is it 
smaller? What do you think about the systemic risk there?
    Ms. Sutter. Thank you for the question.
    I have not done the math on the stock exposure, but I think 
that, to me, the important issue that it raises is kind of what 
it shows about how the Chinese government gets involved when a 
company is in trouble, because it shows what are the rights of 
investors vis-a-vis the Chinese state when you have exposure to 
a Chinese company.
    I think, as I mentioned earlier, right now the parameters 
of exposure seem somewhat manageable, but there is an issue 
about who gets paid, in what priority order, how are you paid. 
We have looked at this in China since the failure of the 
Guangdong Trust, Gzitic, in 1999, as far as just trying to 
preference domestic or international investors, and I think, to 
me, it highlights something to watch about how the government 
is a direct investor in Evergrande as much as it is a regulator 
of Evergrande.
    Mr. Casten. I want to sort of put this somewhat more 
qualitative version of the question to you, Ms. Ross. In the 
absence of our ability for the PCAOB to go in and audit the 
auditors, how confident are you of our ability to answer the 
fundamental question, whether for Evergrande or someone else, 
what is our systemic exposure in the U.S. economy to situations 
like Ms. Sutter described, the specific case of Evergrande, how 
confident are you--what are the error bars around that in your 
view?
    Ms. Ross. Thank you for that question, Congressman Casten. 
It is a very important question.
    Our understanding of systemic risk comes largely from our 
access to information so that we can analyze those risks. That 
is what Ms. Chu does everyday, trying to access the 
information. But when companies list in our public markets, we 
depend on those disclosures to understand the risk, and then on 
a whole basis of all companies from a particular jurisdiction 
or in a particular industry, we use the disclosures, investors 
use the disclosures, markets use the disclosures to assess the 
systemic risk.
    Mr. Casten. Yes. Okay.
    Ms. Ross. We can't fully do that without compliance, and 
that is why it is so important that we be able to enforce our 
accounting and auditing rules.
    Mr. Casten. Okay, and I am sorry to cut you off, but I want 
to get to a question with enough time to answer it.
    We have talked a lot about the Holding Foreign Companies 
Accountable Act as being targeted at China, but I think it is 
important for us to be clear that it doesn't actually say 
China. It says if the PCAOB can't go in and audit the auditors 
for 3 years, they have to be delisted. And of course, you are 
nodding, this only applies right now to China, right? But in 
theory, if another country decided to do that--but right now, 
we are just limited to that exposure in China.
    So, here is my question that I am building to. I want to 
make sure we are not playing whack-a-mole. Let's say that all 
the provisions of the Holding Foreign Companies Accountable Act 
get implemented. All of the good ideas that both sides of the 
aisle have run up here are addressed. It seems to me that we 
still have this huge gap because all of these rules don't apply 
to get into these questions of exempt offerings. Right? Because 
if a company is going to list under one of these exempt 
offerings, all of a sudden, all of these other rules of SEC 
disclosure and what have you don't get there.
    So, how should we be thinking about--because if we address 
this all for sort of conventional, old-timey offerings and 
China still wants to do all of the things we are talking about 
doing that they do do in these hearings, don't they just have a 
back door to come in there through these exempt offerings?
    Ms. Ross. Absolutely. I agree with your line of thinking 
there. We not only have to protect our markets for public 
securities, but we also have to be concerned that if the 
companies are delisted, they will take advantage of our system 
of exempt offerings that allows companies to sell securities 
here to specific kinds of investors under different 
circumstances and not follow our normal disclosure rules.
    Mr. Casten. I am out of time, but maybe just for the record 
afterwards, what I would like to understand is if the Holding 
Foreign Companies Accountable Act only applies to China, how 
much does that potential back door apply to a lot of countries 
beyond China that have a way to back-door in through our exempt 
offering rules?
    And I would welcome a response in writing for the record. 
Thank you, and I yield back.
    Chairman Sherman. I thank the Vice Chair.
    The gentleman from Texas, Mr. Taylor, is now recognized for 
5 minutes.
    Mr. Taylor. Thank you, Mr. Chairman. I appreciate the 
testimony today.
    One thing that I think we may want to get a more detailed 
taxonomy on, and Mr. Lorber, I will start with you, what did 
the Trump Administration do vis-a-vis China? In terms of 
securities, China sanctions, there has been some mention of the 
Holding Foreign Companies Accountable Act, S. 945, which he 
signed into law last year. What did the Trump Administration 
do?
    Mr. Lorber. The Trump Administration did quite a bit on 
China when it came to sanctions. In terms of securities and 
publicly traded securities, in November of 2020, the 
Administration issued Executive Order 13959, which essentially 
prohibited U.S. persons from trading in specific publicly 
traded securities of identified companies that were considered 
Communist Chinese Military Companies (CCMC), an identified list 
of Chinese entities that the Trump Administration determined 
posed a national security threat.
    In addition, there are a range of other sanctions that the 
Trump Administration imposed related to Hong Kong, as I 
mentioned with the XPCC related to activities in Xinjiang, and 
a host of other specific blocking sanctions and designations. 
But the one specific item which related directly to securities 
was that Executive Order.
    And then, finally, in addition, the Administration put out 
a range of guidance and advisories to warn U.S. companies of 
the sanctions and illicit finance-related risks that it 
assessed were emanating from China, and particularly there was, 
as I mentioned, a Xinjiang supply chain advisory that they put 
out, among a series of others as well.
    Mr. Taylor. One of the bills that showed up on my desk when 
I walked in here this morning was H.R. 2072, which deals with 
Xinjiang and the Uyghurs. What did the Trump Administration do 
on this, and which company did they target?
    Mr. Lorber. They designated the XPCC in, I think again, it 
was July 2020, and the XPCC is, according to the Treasury 
Department, the paramilitary organization that runs many of the 
camps, the forced labor institutions within Xinjiang. And so, 
as I mentioned, when they designated them, that entity had 
hundreds of subsidiaries spread around the world, and so there 
was a major impact on companies that were sourcing products 
from Xinjiang to realize, well, we may not be able to source 
that product anymore because it could expose us to U.S. 
sanctions. And in addition to that, they also released the 
supply chain advisory to make clear to companies that were 
sourcing from that area that there were real sanctions and 
other risks associated.
    Mr. Taylor. Are we aware of other companies that should 
have been sanctioned, that the Trump Administration perhaps 
missed?
    Mr. Lorber. I am not personally aware of others that were 
not sanctioned, that the Administration missed.
    Mr. Taylor. Ms. Chu, do you want to--
    Ms. Chu. Thank you.
    The 13949, and I think 14032, the two bills that give 
legislative authority to the China company sanctions program, 
the lists under those, as well as the Department of Defense's 
Section 1260H list, include a total of maybe 80-something 
individual unique companies that are designated as Chinese 
military companies. I have identified hundreds more.
    That includes subsidiaries and direct parents of these 
companies, many of which are directly involved in weapons 
programs and high-tech surveillance, but also in just generally 
China's military modernization drive. That includes companies 
that are building missiles, companies that are developing 
unmanned aerial vehicles (UAVs) in the South China Sea that are 
directly countering U.S. forces.
    So, yes, there are significant gaps in the implementation 
of those sanctions, especially because I think the text of both 
suggested that they would be living, breathing documents 
updated regularly with new information. But neither of those 
lists--the annex of the recent Executive Order, nor the DOD 
Section 1260H list--have been updated since they were released 
this past June. So, I would like to see a consistent effort to 
keep those updated to include new companies and make sure that 
the U.S. goal of sanctioning and prohibiting Chinese military 
companies from accessing U.S. capital is enforced throughout.
    Mr. Taylor. I would appreciate getting that list and 
working with you on that, making sure that we are updating 
that. But I will point out that I think the Trump 
Administration did a good job of going after Chinese military 
companies, working to try to help the Uyghurs. The Trump 
Administration really deserves a lot of credit for what they 
have done, and I appreciate, Mr. Chairman, that we want to 
build on that success.
    I yield back.
    Chairman Sherman. Thank you. I ask unanimous consent to put 
in the record a letter from Muddy Waters Capital, LLC, 
highlighting their work to research fraud involved in Chinese 
publicly traded companies, including Luckin Coffee, that I 
mentioned earlier. Without objection, it is so ordered.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Steil, for 5 minutes.
    Mr. Steil. Thank you very much, Chairman Sherman and 
Ranking Member Huizenga, for holding today's hearing.
    The rise of China is one of the most serious economic and 
geopolitical challenges we face. The Chinese Communist Party 
has embarked on an aggressive campaign to expand its influence 
around the world. A key part of the campaign is Made in China 
2025. Through this initiative, the CCP aims to make China the 
dominant player in high-tech manufacturing.
    Thinking of the important goods that power our modern 
economy--cars, computers, IT, aircraft, agriculture, 
technology, and medical devices--China wants to dominate all of 
those industries. In order to do this, Beijing is prepared to 
deploy subsidies, back foreign acquisitions, and impose forced 
technology transfer agreements. It is a direct challenge to 
American workers and manufacturers, but it is a challenge that 
we can overcome.
    I find it interesting, though, that we are holding this 
hearing as my colleagues across the aisle are considering 
massive tax increases on American workers and on American 
manufacturers. This Made in America tax will make it even 
harder to outcompete China.
    If we are concerned about Made in China 2025, the last 
thing we should do is impose a Made in America tax. My 
colleagues across the aisle are putting forward policies to 
destroy jobs in America, weaken the U.S. economy, and put us at 
a further disadvantage to Communist China.
    Let me shift gears. Mr. Lorber, I want to reference an op-
ed published by my colleagues, Mr. Luetkemeyer and Mr. 
Huizenga, in which they argued that capital controls and 
delistings alone won't change China's behavior. They argued 
that we need to bring sanctions into the policy toolkit 
specifically for dealing with China.
    In your testimony, you described some of the ways our 
Government has sanctioned China-based individuals and companies 
engaged in activity that the U.S. opposes. In targeting 
sanctions, could you add some color as to how we should draw 
the line between truly benign companies and those actually 
involved in activities against U.S. interests?
    Mr. Lorber. Yes, it is a great question, and candidly, it 
can be a challenging line to draw.
    For example, companies that don't provide sufficient 
financial information or financial disclosure, frankly, may not 
be the best target of targeted sanctions because they are not 
engaged in potentially, actual national security threatening 
activity, whereas other companies, for example, as assessed by 
both the Trump and the Biden Administrations, and as Ms. Chu 
was talking about, are involved in the Chinese civil military 
fusion program and are working to bolster the Chinese military. 
And in that situation, I think sanctions would be potentially a 
more appropriate use of the tool--
    Mr. Steil. I appreciate your point and context. Looking at 
the U.S. sanctions regime in particular, to hold some of these 
types of companies accountable, are there any tweaks or changes 
that you would recommend in the sanctions regime under U.S. 
law?
    Mr. Lorber. I don't think I would recommend specific tweaks 
or changes. I think the question is, are there other entities 
that the U.S. Government believes pose national security 
threats, to Ms. Chu's point from earlier, that may justify 
targeting? I think that would be the way I would frame it.
    Mr. Steil. Let me shift gears once again. As you are well 
aware, China is the largest official creditor in the world, and 
although the Chinese development finance hasn't yet eclipsed 
the World Bank or the IMF, a heavily U.S.-influenced 
institution, I think it does pose a pretty significant 
geopolitical and economic challenge. What are the steps that 
you think Congress should be taking to counter Chinese 
influence in developmental finance?
    Mr. Lorber. I apologize, but I probably need to defer on 
that question and get back to you. That is not my area of 
expertise in development finance, so I would want to take a 
look at that question a bit more deeply.
    Mr. Steil. We will continue the discussion offline. I 
appreciate you all being here today.
    Mr. Chairman, thank you for holding today's hearing. I 
yield back.
    Chairman Sherman. Thank you.
    I now recognize Mr. Mooney, the gentleman from West 
Virginia.
    Mr. Mooney. Thank you, Mr. Chairman.
    One of the great problems of today is how free-market 
societies should confront the rising threat of China, a 
Communist authoritarian state with increasing power on the 
world stage. Our trade deficit with China was $310 billion last 
year, an alarming reflection on China's economic power.
    What makes China such a unique adversary is that, unlike 
the Soviet Union, their leadership has not been as 
ideologically rigid. China's leadership has been willing to 
manipulate market forces to their geopolitical advantage.
    My question is for Ms. Sutter. In your testimony, you wrote 
about how American investors have limited access to passive 
investments in China. You talk about the differences between an 
American investor holding passive Chinese investments, and a 
Chinese company and a Chinese investor holding shares directly 
in the same company. Do passive investments give Americans the 
same control as a typical shareholder?
    Ms. Sutter. Thank you, Congressman, for the question.
    I think in my remarks what I was trying to emphasize is 
that China is highly restricted and closed in strategic 
sectors, a lot of the areas of growth in the economy, and that 
they may be using financial investment in tandem with 
technology licensing to get the capital and know-how they know 
without having to let U.S. competitors actually compete within 
the Chinese market.
    The other point I would like to make on passive investment 
that we haven't talked about is under Made in China 2025, the 
government's use of government guidance funds, which is a 
private equity model, in how the Chinese government, the 
Ministry of Finance basically pushes state money into the 
Chinese economy, which is also used in the overseas markets, 
including for acquisitions and investments in other firms. I 
think this private equity model is something to think about as 
it touches the U.S. economy.
    Of course, financial investment, portfolio investment is by 
nature passive, but I think the concern I was trying to raise 
for consideration is, is China using this as a substitute for 
allowing productive U.S. competition on the ground in the 
Chinese market?
    Mr. Mooney. Okay. As a follow-up to that, in your 
testimony, you wrote at length about how China seeks U.S. 
capital to fund its strategic interest. So, how does that work? 
Can you explain that further?
    Ms. Sutter. Yes, and this has been raised in various areas 
of concern that a lot of the Chinese companies who list on U.S. 
exchanges or who are included in U.S. funds increasingly are 
participants in the Made in China 2025 and other Chinese 
industrial policies. So, U.S. capital going into these 
companies could be supporting these programs more broadly.
    And I would like to raise for consideration that because 
China's Made in China 2025 policies are codeveloped by the 
People's Liberation Army (PLA), by the party, and by the state, 
that it poses a challenge for the United States to delineate 
what is truly a company that is military, what is truly a 
company that is of concern. Especially as you get into dual use 
and strategic and emerging technologies, I think this becomes 
increasingly grave potentially.
    Mr. Mooney. Thank you. Let me just say in conclusion that 
free-market competition is what leads to growth and prosperity. 
Those who succeed in a free market are tested by the rigors of 
their competitors and how they serve their clients and they 
serve the people.
    China does not believe in capitalism. China does not 
believe in free markets the way we understand them in America, 
but China is willing to use our financial markets against us. 
They are more than willing to steal our intellectual property 
and tap into our wealth in order to further their nationalistic 
designs.
    On the surface, China is one to make it seem as though they 
are merely participating in the global markets as equals, but 
in reality, they are manipulating our openness for their own 
ends. So to understand how to best react to China's threats, we 
must first come to terms with who they are. They are a 
geopolitical adversary that is always looking for a weakness to 
expose in order to gain an edge.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Sherman. Thank you.
    I now recognize the gentleman from Kentucky, Mr. Barr.
    Mr. Barr. Thank you, Mr. Chairman, and I appreciate the 
chairman allowing me to waive on to this subcommittee.
    As a member of the National Security, International 
Development and Monetary Policy Subcommittee of this Full 
Committee, the Ranking Republican on the National Security 
Subcommittee, a member of the House China Task Force, and a 
member of the Asia, the Pacific, Central Asia, and 
Nonproliferation Subcommittee of the House Foreign Affairs 
Committee, this topic is of acute interest to me, and I want to 
thank the witnesses for the outstanding testimony. It has been 
very, very helpful as we consider a legislative response to the 
challenge of China and Western capital flows to China.
    Earlier this year, I introduced the Chinese Military and 
Surveillance Company Sanction Act, which has received broad 
support from my colleagues on both the Financial Services 
Committee and the Foreign Affairs Committee. The bill seeks to 
address one of the problems we are discussing here today, 
malign Chinese entities using American capital to fuel efforts 
that directly counter U.S. national security interests.
    The bill expands on President Trump's Executive Order 
targeting Chinese military companies as amended by President 
Biden's Executive Order, and my bill takes it a step further. 
Instead of simply banning investment in public equity issued by 
these companies, it directs the President to actively sanction 
them.
    Mr. Lorber and Ms. Chu, can you each elaborate on why a 
bill like mine, which leverages the U.S. sanctions regime, is 
preferable to a ban on public equity investment, as was the 
case with the Executive Orders, or enhanced disclosures such as 
the Holding Foreign Companies Accountable Act?
    And by the way, Mr. Chairman, I supported your bill, the 
Holding Foreign Companies Accountable Act, because Chinese 
companies are not playing by the same rules as other foreign 
companies, and I support your bill to accelerate the timeline 
to 2 years. But that legislation is an investor-protection 
bill. It is not a foreign policy or national security bill.
    So, what do sanctions achieve that these disclosures do 
not, Mr. Lorber?
    Mr. Lorber. Thank you, Representative Barr.
    The primary differences between the current Executive 
Orders that are in place that you referenced, and the proposed 
legislation, is the scope of the prohibition. Right now, under 
the current Executive Orders, the companies that are 
identified, U.S. persons are prohibited from transacting in 
publicly traded securities, but that is it.
    By actually designating the entities that are contained on 
the list, you actually prohibit U.S. persons from transacting 
with them in any way. In addition, the scope of the Executive 
Order is limited to the specific companies that are identified 
on the list, but by blocking them by adding them to the SDN 
list, you would automatically include any companies that those 
listed entities own or control. So, the scope of it would be 
much, much broader.
    Mr. Barr. And Ms. Chu, when you answer the question, could 
you also explain the mechanics of OFAC designations? In other 
words, take an index like MSCI or BlackRock's announcement on 
August 30th that it would triple American investments in China, 
and explain how that might change and alter the composition of 
these index and these investments?
    Ms. Chu. Thank you for the question.
    In the past 3 years--I believe it was May 2018 when MSCI 
began or announced it was going to begin including Chinese A-
shares in its indices. The exposure of U.S. investors to A-
shares, which are companies listed on the Shanghai and Shenzhen 
exchanges, has shot up exponentially. There were none at that 
point, only eight shares in ADRs.
    So, I believe that applying sanctions to Chinese military 
companies and Chinese surveillance companies in addition to 
existing restrictions on capital investment would be an ideal 
way to align national security objectives across sanctions 
programs.
    Mr. Barr. If OFAC sanctioned these entities, the MSCI and 
the index would presumably have to pull out those designated 
firms from their index. Is that correct?
    Ms. Chu. Right. I believe that the Executive Orders and the 
Office of Foreign Assets Control (OFAC) implementation require 
divestment by securities or exposure to the securities. But it 
was unclear, and there are a lot of index providers and 
investment companies that were struggling for a long time--it 
just ended last year--to figure out if they were supposed to 
implement this, if there were any sort of enforcement measures. 
So, I believe those factors should all be made more clear and 
potentially an amendment to the ways that these capital market 
sanctions and restrictions can be applied.
    Mr. Barr. And Mr. Lorber, can you talk about the force 
multiplier of sanctions versus U.S. securities disclosures in 
terms of preventing a circumvention and a rerouting of capital 
to foreign exchanges?
    Mr. Lorber. Yes, it is a good point. There is the usual 
occurrence where the U.S. Government, for example, OFAC, 
sanctions somebody. As long as there is U.S. jurisdiction, non-
U.S. companies are obliged to follow those rules and 
regulations. So, what you would see is oftentimes non-U.S. 
persons, non-U.S. companies operating in foreign jurisdictions 
wouldn't touch those securities because they would be blocked 
property, so there would be a significant extension of the 
impact beyond just U.S.--
    Mr. Barr. It would have a multilateral impact.
    Mr. Lorber. Yes.
    Mr. Barr. My time has expired. But Mr. Chairman, thank you 
very much, and I appreciate your leadership on the disclosures 
front. We are just making the point that OFAC is another 
important tool. I yield back.
    Chairman Sherman. Thank you.
    As is our tradition, I will be recognizing the ranking 
member, then myself, for very brief closing comments.
    The ranking member of the subcommittee, Mr. Huizenga, is 
now recognized.
    Mr. Huizenga. Thank you, Mr. Chairman, and I want to thank 
the panelists for being here today. It has been very 
illuminating and informative and helpful.
    One special person I do want to recognize--I know Ms. Ross 
has a special guest assistant with her. And sorry, it is our 
jobs as parents to embarrass our kids. I have kids about the 
same age, but I'm glad you have participated, and frankly, I 
will note that you had more stamina than most of the Members of 
Congress, making it through a 2 hour-plus hearing.
    But this is why we are doing this. This is why we are all 
here, is to make sure our kids and our grandkids have a better 
future than what we have, and that is why this question, this 
issue is so important to what we are talking about, and that 
really is, I think, the common motivator for so many of us.
    I did hear a couple of common themes today. Common theme 
one, China cheats. Not just China writ large--it could be the 
Chinese Communist Party, it could be the Chinese Army, it could 
be all of the business entities that are either shell or they 
might be partially related, or whatever they are, but we know 
that China does cheat.
    Common theme two, we also know that China controls things 
as much as they possibly can. And common theme three, China is 
out for China. They are not out for their investors. They are 
not out for their citizens. They are not out for the world 
economy. They are out for China and their way of life and their 
governmental structure.
    And I would think that if you can accept one, two, and 
three, then you have to ask the question, how will additional 
rules, requirements, demands, temper tantrums, whatever it is, 
how is that going to change China's actions? And that is what 
this is about, and I don't think those things will.
    What does get China's attention is sanctions, economic 
pressure, sanctions and a strong, robust U.S. economy that can 
not just compete but can actually outdo, can offer even better 
options than what they can--not just in our country, but around 
the world. So, we need a positive environment for our 
entrepreneurs, our small innovators, our risk-takers, the 
things that have made the U.S. such a powerful force in this 
world, and a force for good, by the way.
    There are more people who have been lifted out of poverty 
with capitalism versus socialism or communism. There are more 
opportunities that have happened across-the-board for every 
single citizen of any country that has taken that route, and we 
need to encourage that, and I just want to emphasize that as we 
are looking at lots of discussions outside of this committee as 
well, what is going to be getting done here in our economy. We 
need to be conscious of this.
    What is separating us from other areas and other countries 
in the world like China, and how are we going to maintain our 
edge? And it is through creating an environment that allows 
others to succeed and for us to succeed.
    With that, Mr. Chairman, I do appreciate you holding this 
hearing today, and I look forward to the conversation, and I 
look forward to learning more about your bills that you are in 
the process of drafting, and I look forward to this 
continuation.
    Chairman Sherman. I look forward to working with you.
    Mr. Huizenga. With that, I yield back.
    Chairman Sherman. Before I took over this subcommittee, I 
chaired the Subcommittee on Asia over on the House Foreign 
Affairs Committee, working with Mr. Barr. And I came to the 
conclusion that on the big issues that affect China across-the-
board--South China Seat, belt and road, the running of a huge 
trade surplus for them with the United States, their theft of 
IP, the big things--nothing is going to change Chinese behavior 
except across-the-board tariffs on their entire economy, that 
even sanctions on one or two companies won't be enough to 
change their overall policy. But that is outside the 
jurisdiction of this Subcommittee, and the Full Committee, for 
that matter.
    Focusing on the jurisdiction of this subcommittee, we have 
seen an illustration of the power that China has through 
selective access. By allowing some banks, some investment banks 
to have access to China but not others, they have control over 
what Morgan Stanley advises its clients and what Morgan Stanley 
publishes in its index, which then makes us wonder whether 
those who publish indexes should be required to register as 
investment advisers so that we get that fiduciary 
responsibility in that process to counterbalance the power that 
China would otherwise have.
    I believe it was Mr. Gonzalez who pointed out that whatever 
we do in our markets, American investors can always go 
elsewhere. And that is true. We are a free country. You can 
take your life savings, sell your house, put all the money in a 
suitcase, go to Monaco, and put it all on double zero.
    But the purpose of this subcommittee is to protect those 
investors who are investing in U.S. markets, U.S. exchanges, 
trust funds regulated by U.S. laws, ERISA plans and mutual 
funds, et cetera. Those who do that expect to have some 
investor protection. Those in Monaco, you are dependent upon 
the laws of that principality.
    Mr. Himes points out that we have had accounting frauds in 
the United States. I was here for Enron and WorldCom. That is 
why we passed Sarbanes-Oxley and established the PCAOB. We 
needed it. That is why we passed it. We needed it to protect 
American investors.
    And it isn't just China that didn't cooperate. Belgium 
didn't cooperate either. But we passed the bill last year, and 
we got tough with Belgium and, ``big waffle'' folded, and now 
we have the deal with Belgium. Hopefully, we will get the same 
out of China as well.
    The purpose of that bill and the acceleration bill is to 
protect investors by getting the same kinds of controls that we 
found we needed after WorldCom and Enron, and that we clearly 
need for Chinese companies as well.
    The VIE structure means that you are not a shareholder. 
People should understand that, and you are not one of the 
thousand biggest companies in the world if you are Alibaba 
Cayman Islands. You don't belong in indexes. You are not even a 
company. I don't know what you are. You are a shell that 
invests in another shell that has a contractual relationship.
    When you invest in a Chinese company, you may not have any 
right to elect the board. Even with those who do elect the 
board, the board may put the interest of the Chinese Communist 
Party above those who elect them. And even if the board seeks 
to deploy the assets of the company to further the interest of 
the shareholders, the government is free to sanction, seize, 
and redirect, all without the protections of a legal system 
designed to protect private property.
    So, we have a lot to do to protect American investors who 
invest in China, and even more to do with the overall 
relationship with China.
    The Chair notes that some Members may have additional 
questions for these witnesses, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is adjourned.
    [Whereupon, at 12:23 p.m., the hearing was adjourned.]

                            A P P E N D I X


                           October 26, 2021
                           
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