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



                   INVESTING IN OUR RIVALS: EXAMINING
                  U.S. CAPITAL FLOWS TO FOREIGN RIVALS
                    AND ADVERSARIES AROUND THE WORLD

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

                             HYBRID 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

                             SECOND SESSION

                               __________

                           NOVEMBER 15, 2022

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 117-103
                           
                           
                           
                           
		[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


				________


	             U.S. GOVERNMENT PUBLISHING OFFICE

49-483 			    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                     TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois                ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts       JOHN ROSE, Tennessee
RITCHIE TORRES, New York             BRYAN STEIL, Wisconsin
STEPHEN F. LYNCH, Massachusetts      LANCE GOODEN, Texas
ALMA ADAMS, North Carolina           WILLIAM TIMMONS, South Carolina
RASHIDA TLAIB, Michigan              VAN TAYLOR, Texas
MADELEINE DEAN, Pennsylvania         PETE SESSIONS, Texas
ALEXANDRIA OCASIO-CORTEZ, New York   RALPH NORMAN, South Carolina
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, Vice Chair    BRYAN STEIL, Wisconsin
EMANUEL CLEAVER, Missouri            VAN TAYLOR, Texas
                            
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 15, 2022............................................     1
Appendix:
    November 15, 2022............................................    27

                               WITNESSES
                       Tuesday, November 15, 2022

Alexander, Courtney, Senior Research Analyst, United Food and 
  Commercial Workers International Union.........................     4
Chu, Claire, Senior China Analyst, Janes Group...................     6
Ferry, Jeff, Chief Economist, Coalition for a Prosperous America 
  (CPA)..........................................................     8
Sonnenfeld, Jeffrey A., Senior Associate Dean for Leadership 
  Studies, Yale School of Management.............................    10

                                APPENDIX

Prepared statements:
    Huizenga, Hon. Bill..........................................    28
    Alexander, Courtney..........................................    32
    Chu, Claire..................................................    42
    Ferry, Jeff..................................................    60
    Sonnenfeld, Jeffrey A........................................    70



 
                   INVESTING IN OUR RIVALS: EXAMINING
                  U.S. CAPITAL FLOWS TO FOREIGN RIVALS
                    AND ADVERSARIES AROUND THE WORLD

                              ----------                              


                       Tuesday, November 15, 2022

             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 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Brad Sherman 
[chairman of the subcommittee] presiding.
    Members present: Representatives Sherman, Scott, Himes, 
Foster, Vargas, Gottheimer, Casten; Mooney, and Gonzalez of 
Ohio.
    Ex officio present: Representative Waters.
    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 the subcommittee are 
authorized to participate in today's hearing.
    Today's hearing is entitled, ``Investing In Our Rivals: 
Examining U.S. Capital Flows to Foreign Rivals and Adversaries 
Around the World.''
    And I do want to apologize for the fact that this hearing 
is taking place while the Republicans are holding their 
leadership elections. We scheduled this hearing, and then, 
apparently in determining when to have their leadership 
elections, Mr. McCarthy didn't think that this was the most 
important thing to avoid scheduling against. Still, obviously, 
this would be a better hearing if we had the full participation 
of the current minority party. Although, Mr. Gonzalez will 
represent his party well.
    I will now recognize myself for 4 minutes for an opening 
statement, and then I will turn to Mr. Gonzalez.
    Over a year ago, we had a hearing on China, Inc. This 
hearing builds on that. Americans are investing in Russia to 
some degree, not much now, and substantially in China.
    There are 262 Chinese companies listed in the United 
States, and of course, Americans are free to invest in Hong 
Kong and Shanghai, including our index funds.
    Eight Russian firms were suspended from trading in the 
United States. Some $83 billion of American capital has been 
invested in Russia.
    This raises three types of issues: macroeconomic; investor 
protection; and national security. As to macroeconomic, capital 
is very good for a capitalist system. We send $1.2 trillion of 
capital to China. Some would say, why don't we just stop? Well, 
China provides $2.1 trillion to the U.S. economy.
    But not all capital is equal. Equity capital does more. 
Risk capital does more to build a capitalist economy. We send 
$1.1 trillion in equity capital to China. They send only $700 
billion of equity capital to the United States.
    Don't take my word for it that equity capital is more 
important. That esteemed institution, the U.S. Congress, has 
decided to spend $200 billion every year on our capital gains 
allowance to encourage equity investment.
    But for some reason, we not only subsidize Americans who 
invest in America, but we provide that same capital gains 
allowance to those investing in the Chinese economy. I just 
want to point out, that is not on us; another committee is 
responsible for that.
    First, on investor protection, we have the Public Company 
Accounting Oversight Board (PCAOB) in Hong Kong now. Congress 
passed the bill I sponsored in the House, the Holding Foreign 
Companies Accountable Act. China has agreed in principle, and 
now work is going on in Hong Kong to see whether they will 
actually implement that important legislation. We will know 
more at the end of the year.
    Second, on investor protection, we have the variable 
interest entity (VIE) structure. You think you are buying 
Alibaba stock, but you are not. You are buying Alibaba Cayman 
Islands, which then has a contractual relationship with a shell 
company in China, which then has a contractual relationship 
with Alibaba.
    We have to see what risk that poses for investors and 
particularly wonder whether index funds should be investing--
when they say they are investing in the biggest companies in 
the world, Alibaba Cayman Islands is not one of the biggest 
companies in the world.
    And to say that with little investigation, capital should 
be deployed through this VIE structure is questionable, and it 
is also questionable whether index funds should go outside the 
United States, invest in the Shanghai or Hong Kong exchange 
perhaps, in Chinese companies that have deliberately avoided 
the PCAOB by delisting from the United States.
    And we then turn to the national security issues. When 
Americans invest in Chinese companies, that creates a lobbying 
interest here in the United States to support the success of 
those companies, and ultimately, China. In addition, it can 
create an incentive to transfer technologies to those Chinese 
companies which are the subject of U.S. investment.
    We should know which Chinese companies are raising money 
here by changing our rules to say that when there is a private 
placement, even if they don't choose to use Regulation D or one 
of the other safe harbors, that there is some registration in 
the major deals.
    Not only the SEC, but under certain circumstances, other 
U.S. Government agencies can look at private files and see what 
is coming in. Likewise, we ought to see when a hedge fund or a 
private equity fund already is required to file a foreign PF 
with the SEC, and we should know whether they are getting 
substantial amounts of Chinese capital or Russian capital.
    With that, I will turn to Mr. Gonzalez for an opening 
statement.
    Mr. Gonzalez of Ohio. Thank you, Chairman Sherman. I will 
be very brief. First, I would like to submit for the record the 
opening statement of Representative Bill Huizenga, the ranking 
member of this subcommittee.
    Chairman Sherman. Without objection, it is so ordered.
    Mr. Gonzalez of Ohio. Thank you.
    To pick up on what Mr. Sherman was saying about our 
leadership elections, to our witnesses and those watching on C-
SPAN, please do not take the absence of Republican Members 
today as disinterest on the Republican side. We have been just 
as engaged and aggressive, I think, when it comes to what are 
the right policy measures that we should be taking vis-a-vis 
China, Russia, and our adversaries, what role the capital 
markets play, and what policies we should advocate for. We 
simply have our leadership elections today, and there is 
certainly nothing that I can do about that.
    Some would say, as one person who didn't run for 
reelection, I might actually be the smartest Member of Congress 
in this room today. I am not saying that; some people might say 
it. But with that, I will yield back. Thank you.
    Chairman Sherman. Thank you. I now yield 1 minute to the 
distinguished Chair of the full Financial Services Committee, 
Chairwoman Waters.
    Chairwoman Waters. Thank you very much for this hearing. 
Each year, billions of dollars of capital from the United 
States is invested into companies owned by, controlled by, or 
affiliated with China and Russia, undermining our national 
security.
    After Putin invaded Ukraine, I wrote to groups representing 
U.S. businesses and investment funds to question whether they 
would divest from Russia. Unfortunately, dozens still have not.
    Protecting our national interests is not a partisan issue. 
We worked together to reauthorize and reform the Committee on 
Foreign Investment in the United States (CFIUS) in 2018, the 
Export-Import Bank in 2020, and on several measures to isolate 
Russia and China earlier this year.
    I hope this hearing will help us identify further ways to 
ensure that our national security is bolstered by the strength 
of our private markets. I yield back.
    Chairman Sherman. Thank you.
    We have a great panel of witnesses here today. It is not 
just me saying that. The Republicans were entitled to have a 
witness, but they looked at how beautiful the panel was that we 
created and decided they had nothing to add, and I couldn't 
agree with them more.
    I do think we have outstanding witnesses. First, we have 
Courtney Alexander, senior research analyst at the United Food 
and Commercial Workers International Union, who has focused on 
the flow of capital to China, and particularly Americans 
investing in facial recognition and other technologies that 
might help allow the Chinese government to impose a police 
state on its own citizens.
    Second, we have Claire Chu, a senior China analyst at the 
Janes Group, who is focused on the rights and lack of rights 
that investors have in the VIE structure, and index funds 
ignoring that and investing indirectly in China.
    Third, we are going to hear from Jeff Ferry, the chief 
economist at the Coalition for a Prosperous America, who is 
focused on decoupling from China and on the possibility of 
tariffs.
    And finally, to introduce our last witness, I recognize Mr. 
Himes.
    Mr. Himes. Thank you, Mr. Chairman, and it is a delight to 
welcome a fellow citizen of the nutmeg State. From Connecticut, 
we have the senior associate dean for leadership studies at the 
Yale School of Management, Jeffrey Sonnenfeld.
    He has had a tremendous academic career, including time at 
the Emory Business School, but I seize this moment to do a 
brief introduction because in addition to his academic work, he 
has, in the last several months, been an extremely aggressive 
leader on pushing corporate America, in his guise as a 
professor of leadership, to reflect on the values that 
corporate America and corporations around the world demonstrate 
if they make the decision to continue to work in the nation of 
Russia, and to continue to be part of the economic engine which 
drives the authoritarian brutality that we see in Ukraine.
    We are deeply grateful to Dr. Sonnenfeld for doing that, 
and we are deeply grateful for his work in the State of 
Connecticut in helping us with our economic issues, and it is a 
delight to welcome him here today.
    Thank you, Mr. Chairman.
    Chairman Sherman. Thank you, Mr. Himes.
    Witnesses are reminded that their oral testimony will be 
limited to 5 minutes. You should be able to see a timer that 
will indicate how much time you have left. I would ask that you 
be mindful of the timer so that we can be respectful of both 
the witnesses' and the committee members' time.
    And without objection, your full written statements will be 
made a part of the record.
    Ms. Alexander, you are recognized for 5 minutes.

   STATEMENT OF COURTNEY ALEXANDER, SENIOR RESEARCH ANALYST, 
     UNITED FOOD AND COMMERCIAL WORKERS INTERNATIONAL UNION

    Ms. Alexander. Thank you, Chairman Sherman, Ranking Member 
Huizenga, and members of the subcommittee. My name is Courtney 
Alexander, and I work for the United Food and Commercial 
Workers International Union.
    I am here to address my recent work analyzing the outflow 
of capital from U.S. private equity firms to China. That 
capital includes public employee pension money invested by 
private equity firms in a country of national security concern.
    My testimony details a case study which we believe 
illustrates the need for public disclosure by private equity 
firms of their investments in countries of concern.
    In 2017, KKR Asian Fund III founded a Chinese artificial 
intelligence company called Cue Group. KKR owned and controlled 
Cue until late 2021. Cue was described by KKR as, ``the first 
one-stop digital marketing company for the Chinese market.''
    KKR's digital marketing company went on to jointly develop 
surveillance technology with an arm of the Ministry of Public 
Security, the organization that oversees China's vast 
surveillance systems.
    In 2020, Cue had jointly developed technology with the 
Video National Engineering Laboratory Zhuhai Innovation Center, 
a government lab run by the First Research Institute of the 
Ministry of Public Security.
    Zhuhai Lab and the First Research Institute play key roles 
in China's surveillance state, and the First Research Institute 
works with Chinese entities sanctioned by our government for 
facilitating human rights abuses or participating in the 
Chinese military-industrial complex.
    CUE's jointly-developed product was called the CUE Real-
time AI Facial and Body Temperature Detector, integrating 
facial recognition, thermal detection, and identity data. It 
was used for pandemic surveillance, reading body temperatures, 
tracking 14-day migration of individuals, and identifying 
companions.
    CUE's technology also had potential non-pandemic uses for 
recognizing, ``blacklisted persons,'' and ``to prevent 
incidents involving mass gatherings.''
    Additionally, Zhuhai Zhongdun Star Technology Company, 
which KKR identified as an indirect KKR subsidiary, was a 
strategic signatory of the government's Zhuhai Lab. Zhuhai 
Zhongdun Star had participated in the, ``Safe Campus'' 
surveillance project. This past February, The Wire China 
profiled KKR's investment in Cue and Cue's collaboration with 
the public security lab.
    KKR and Cue denied the collaboration to The Wire, however, 
``The Zhuhai lab confirmed in an email to The Wire that it had 
at one time collaborated with Cue on one of its wholly-owned 
subsidiaries.''
    The Zhuhai Innovation Center was formed by the National 
Engineering Laboratory for Intelligent Video Analysis and 
Application called NELIVA. NELIVA's laboratory director is Qiu 
Baoli. Qiu was previously the deputy director of the Public 
Security Bureau of the Xinjiang Construction Corps, which was 
sanctioned for human rights violations.
    NELIVA's ruling council also includes entities sanctioned 
by the U.S., including Hikvision, Huawei, and the Institute of 
Automation of the Chinese Academy of Sciences.
    First Research Institute, which runs the Zhuhai Lab, 
designed what it called SkyNet in Xinjiang, which it co-built 
with the Public Security Department of Xinjiang, an entity 
sanctioned for its role in human rights violations. To be 
clear, we do not have information that Cue's surveillance 
technology was used in Xinjiang, or to violate human rights.
    In response to our research, KKR told me the firm conducts 
very careful screening on issues of privacy, surveillance, and 
geopolitics, and that former General David Petraeus leads a 
team at KKR Global Institute to help assess every KKR 
investment for such risks.
    This process concerns us. KKR's purported risk review may 
have missed Cue's own promotion of its collaboration with a lab 
run by China's surveillance apparatus, even though KKR 
executives served on the board, or possibly KKR's review may 
have identified Cue's connections to China's surveillance lab 
and still knowingly kept its investment and board seats.
    Whatever the case, we find it hard to trust that private 
equity can sufficiently police itself when it invests in China.
    Cue's surveillance and advertising business paid its 
investors well. Late last year, KKR sold a potential interest 
in Cue to Baring Private Equity Asia in a deal valuing KKR's 
stake at 3 times its investment.
    Money talks, surveillance pays, and the American public 
needs tools to protect our country's interests.
    That is even more true when you consider that KKR Asian 
Fund II investors include public employee pension funds, like 
the Washington State Investment Board, the Florida State Board 
of Administration, the Oregon Treasury, and the Texas Permanent 
School Fund.
    When we asked public pension funds to divest Cue, some said 
they could not exit an individual investment because they were 
limited partners, and one fund said it relies on the Federal 
Government to flag investments of national security concern.
    Therefore, we urge you to give public pension funds, 
investors, regulators, and American citizens the tools to hold 
private equity accountable to our own national security and 
human rights interests, by mandating public disclosure of all 
subsidiaries and investments in countries of national security 
concern.
    Last, the Cue story was uncovered through public data from 
other countries. Germany, Singapore, and China all require more 
public disclosure from companies than we do. So when their 
firms argue that investments are proprietary, ask them why 
Americans don't deserve the same information they give to China 
and Singapore.
    Thank you very much for holding this hearing today.
    [The prepared statement of Ms. Alexander can be found on 
page 32 of the appendix.]
    Chairman Sherman. Thank you, Ms. Alexander.
    Ms. Chu, you are now recognized for 5 minutes.

   STATEMENT OF CLAIRE CHU, SENIOR CHINA ANALYST, JANES GROUP

    Ms. Chu. Chairman Sherman, Ranking Member Huizenga, and 
members of the subcommittee, thank you for the opportunity to 
appear here today. I am the senior China analyst at Janes, an 
open-source intelligence firm where I specialize in the 
national security implications of China's global economic 
activity.
    In particular, I research how the Chinese government 
manipulates private-sector interests and commercial 
relationships in order to achieve strategic policy goals.
    I have been asked to speak on U.S. capital flows to China 
in light of Russia's invasion of Ukraine. I will also provide 
recommendations for ways in which the United States can refine 
its economic and financial toolkit in order to respond to the 
unique risks posed by U.S. investor exposure to Chinese and 
Russian companies, and conversely, posed by adversarial 
nations' access to U.S. capital.
    The concept of economic statecraft is not new, but it has 
evolved. The playing field has expanded beyond trade sanctions 
and tariffs to include options like financial sanctions and 
capital flow restrictions. Not everyone is on board just yet.
    The national security community has started to recognize 
the international financial system as a potential warfighting 
domain, although the Pentagon can be reticent to encroach on 
Wall Street's territory, and financial institutions aren't 
interested in what they consider to be the politicization of 
private markets, and find it difficult to reconcile national 
security objectives with their fiduciary responsibilities.
    Following Russia's invasion of Ukraine earlier this year, 
we saw how quickly the U.S. Government was able to mobilize at 
not only the Federal, but also the State and local levels, as 
well as in sync with allies to isolate Russia from global 
financial markets.
    Financial actors, including stock exchanges and global 
index providers, also took swift action. Although at some 
level, this was not an ethical response as much as it was a 
financial choice, because Russia's stock had become 
uninvestable.
    The unprecedented and expansive nature of the sanctions 
imposed on Moscow has raised the specter of the U.S. taking a 
similar approach with Beijing if red lines were to be crossed.
    The scale of U.S. economic and financial exposure to China 
is significantly greater than it is to Russia, and observers 
have wondered whether China's weight in a global economy 
insulates it from Western sanctions. Yes, China has a larger 
economy than Russia, and as Russia's stock market was valued at 
780 [inaudible]. However, China had a cumulative $11 trillion 
in its mainland forces.
    And yet, the United States' stock market is the largest in 
the world, representing nearly half of global equity, about $51 
trillion, nearly 4 times the next largest market, China.
    I would posit that the United States could use financial 
sanctions more effectively than almost any other country in the 
world.
    Capital flows can have a more immediate impact than trade 
flows. Capital markets are one of the United States' greatest 
strengths, and we should be analyzing how to harness financial 
markets, institutions, and instruments in the service of 
foreign policy and national security.
    U.S. investor exposure to publicly traded Chinese companies 
has expanded dramatically over the past few years, with the 
inclusion of mainland Chinese A-shares in global stock indices 
and various investment products.
    Institutional investors like public pension funds and 
university endowments have all taken different approaches to 
investing in China. Although nearly all have some level of 
exposure, owing to the use of passive investment strategies 
which allow fund managers to delegate investment decisions to 
index providers that wield virtually unregulated authority over 
U.S. capital flows to China.
    U.S. investors are consequently exposed to a wide range of 
Chinese companies engaged in activities contrary to the 
national security and foreign policy interests of the United 
States.
    Many are already sanctioned by the United States, but not 
subject to any investment restrictions or divestment mandates 
and are able to continue raising capital in the U.S. markets.
    Private funds, which represent a significant portion of 
institutional portfolios, function as unregistered investment 
vehicles that are not required to verify or disclose investors' 
identities or sources of funds.
    This presents an ideal environment where the U.S. Treasury 
cannot enforce sanctions, where Russian oligarchs like to park 
their wealth, and where Chinese state-owned firms are able to 
gain non-transparent access to sensitive U.S. businesses and 
technologies.
    The United States should consider establishing an 
interagency committee or a task force to coordinate the Federal 
Government's activities in response to various global economic 
and financial challenges, whether that be to capital markets 
access, foreign procurement, or critical mineral security.
    There should also be more clear engagement with Silicon 
Valley and Wall Street stakeholders in order to create 
opportunities for cooperation, and to effectively communicate 
policy guidance.
    U.S. regulatory authorities need to accelerate plans to 
expand oversight and increase disclosure requirements for index 
providers and private market actors, as well as enact China- 
and Russia-specific due diligence practices in order to 
identify and mitigate this evolving category of risks to 
investors in the United States.
    Thank you. I look forward to your questions.
    [The prepared statement of Ms. Chu can be found on page 42 
of the appendix.]
    Chairman Sherman. Thank you, Ms. Chu. And I am glad our 
witnesses are sticking to the 5-minute limit.
    Mr. Ferry, you are now recognized for 5 minutes.

   STATEMENT OF JEFF FERRY, CHIEF ECONOMIST, COALITION FOR A 
                    PROSPEROUS AMERICA (CPA)

    Mr. Ferry. Thank you. The Coalition for a Prosperous 
America (CPA) thanks the subcommittee for holding this hearing 
to explore the risk posed to American investors by nations that 
are adversarial and hostile to U.S. interests, most notably 
Russia and the People's Republic of China. CPA is a bipartisan, 
nonprofit organization representing exclusively domestic 
manufacturers, producers, and workers across many sectors of 
the U.S. economy.
    I am Jeff Ferry, the chief economist at CPA. In addition to 
my work as an economist, I have also worked in a U.S. optical 
networking company competing with Chinese companies, and as a 
hedge fund analyst for a $100-million technology hedge fund.
    Especially alarming to CPA and our members are the risks 
posed to U.S. investors by Chinese Communist Party (CCP)-linked 
companies that are actively exploiting our free and open 
capital markets. In 2020, U.S. holdings of Chinese securities 
neared $1.2 trillion, which is about 5 times the holdings of 
any other country. The exposure of U.S. investments in Chinese 
securities has never been greater, and it will continue to 
grow.
    My testimony will focus primarily on the problem of U.S. 
investor exposure to Chinese securities, the risks this poses 
to U.S. economic and national security, and potential solutions 
that should be considered.
    My oral testimony focuses on three main components: A-
shares and passive investment; the Federal Government's own 
Thrift Savings Plan, which many of the people in this room are 
invested in; and the need for closing gaps in U.S. sanctions 
policy via sanctions harmonization.
    Further details and policy solutions may be found in my 
written testimony.
    First, A-shares and passive investments. Congress, the 
media, and regulators have recently focused on the risks posed 
to U.S. investors from Chinese companies directly listed on 
U.S. stock exchanges. While CPA welcomes this focus and 
encourages further action, it does not address the bulk of bad-
actor Chinese companies that are present in American passive 
investment products.
    Their presence is in the form of over 4,200 A-share and H-
share companies found throughout a multitude of financial 
vehicles such as exchange-traded funds and index mutual funds 
that have received little or no regulatory scrutiny or 
fiduciary due diligence.
    Tens of millions of Americans are unwittingly exposed to 
these A-shares in their investment portfolios and retirement 
investment accounts. U.S. investors are inadvertently 
subsidizing Chinese companies involved in activities that are 
contrary to the national security, economic security, and 
foreign policy interests of the United States.
    We are also subsidizing the economic growth of our own top 
global adversary.
    For those who are unaware, A-shares are securities listed 
on mainland Chinese exchanges and only accessible to American 
and foreign investors via inclusion in indexes in associated 
index funds.
    It is similar for H-shares, which are listed in Hong Kong. 
These companies are predominantly noncompliant with U.S. 
security laws and financial reporting norms, and in some cases, 
they have even been sanctioned by the U.S. Government for 
egregious human rights and national security abuses.
    The financial industry will not lead. Congress must do so. 
To ensure against further American investment flowing to 
Chinese companies that pose investor protection, national 
security, and human rights concerns, Congress should take 
action to increase transparency and accountability for passive 
investing and more. I outline key recommendations in my written 
testimony submitted today.
    Next, the Federal Government's Thrift Savings Plan (TSP). 
The Thrift Savings Plan is the largest defined contribution 
pension system in the country, with more than $730 billion in 
assets.
    In June of this year, the TSP's administrators enabled TSP 
participants to invest up to 25 percent of their savings in 
more than 5,000 mutual funds via a new platform called the 
Mutual Fund Window. CPA research found that 5 of the largest 
investment funds in the Window had an average weight of 22 
percent towards Chinese companies, and all 5 funds held 
companies listed on the U.S. Department of the Treasury's list 
of Chinese Military-Industrial Complex Companies, the 
Department of Commerce's Entity List, the Department of 
Commerce's Unverified List, and the Defense Department's 
Chinese Military Companies List.
    We would like to see all of these lists harmonized to 
enable American investors to know and to avoid investing in 
Chinese companies that are involved in Chinese civil military 
fusion and other activities harmful to the United States.
    I will just wrap up, as I am out of time.
    In conclusion, the U.S. Government should take the 
necessary steps to ensure that passive investment and 
government pensions are safe and secure from adversarial, 
authoritarian regimes like China. They should do so because it 
is in the best interest of the U.S., from both a national 
security and an economic security perspective.
    The financial industry will not fix these problems which 
are existential, national, and economic security risks to 
America. The risks are increasing daily. Congress must pass 
laws that the financial industry must comply with in the 
national interest. Thank you very much.
    [The prepared statement of Mr. Ferry can be found on page 
60 of the appendix.]
    Chairman Sherman. Thank you, Mr. Ferry.
    Mr. Sonnenfeld, you are now recognized for 5 minutes.

 STATEMENT OF JEFFREY A. SONNENFELD, SENIOR ASSOCIATE DEAN FOR 
         LEADERSHIP STUDIES, YALE SCHOOL OF MANAGEMENT

    Mr. Sonnenfeld. Thank you very much. I just wanted to thank 
you, Chairman Sherman, for the invitation, Ranking Member 
Huizenga in absentia, and of course, Congressman Gonzalez, for 
representing Ranking Member Huizenga and your party today.
    Distinguished members of the subcommittee, I am honored by 
this opportunity to testify. I want to particularly thank 
Chairwoman Waters for her catalytic role in raising some 
critical issues that we are all wrestling with this afternoon 
across this panel and, in absentia, Ranking Member McHenry for 
his own great interest in this topic.
    And, Congressman Himes, I am quite honored by that 
wonderful introduction. I think we probably will not be sitting 
near each other, though, at the Harvard-Yale game this coming 
weekend, unfortunately.
    I should also just mention quickly that I am very honored 
to be here with this distinguished panel of fellow presenters. 
I agree largely with the positions that they share and admire 
everything about them.
    But I must admit I am very envious of their punctuality, 
and I am worried that I am the only schoolteacher here, so I 
will be watching the clock.
    I should also mention being in this beautiful room--if 
there is nothing else that gets taken away from the material 
that I want to present today, it should be how important it is 
that this topic be represented in this room, in this city, at 
this time, because it represents a confluence of leadership 
across sectors, that neither sector has the monopoly on working 
successfully in diplomacy, and that the private sector has 
something important to contribute here, and the public sector 
does as well.
    When we talk about economic blockades, sadly, it often 
falls down into these corporate withdrawals, how successful are 
they, or taking a look at government sanctions. It only works 
when they work in concert, and I am so happy we have the chance 
to take a look at how the sectors can work together instead of 
throw stones at each other.
    I am Jeff Sonnenfeld, senior associate dean for leadership 
studies, Lester Crown Professor of Management Practice at Yale 
School of Management, and founder and chief executive of the 
Chief Executive Leadership Institute, which is a division of 
Yale University, which is the world's first school for 
incumbent CEOs.
    Well before the World Economic Forum of Davos or CEO-
targeted events elsewhere, we sort of created that space as a 
purely educational forum. It is noncommercial, nonadvocacy, and 
nonpartisan. We have, as a matter of fact, political leaders 
from all sides of the aisle. Many Members of Congress, some 
with us today, have been in our forums. Four U.S. Presidents, 
from President Biden to President Trump, have been regular 
participants joining with our corporate leaders.
    I have been working in this field of corporate 
responsibility for 45 years. My first book was entitled, 
``Corporate Views of the Public Interest,'' published in 1981. 
It is not a bestseller. And I have published about 200 
scholarly articles and 7 books in this field, advised thousands 
of CEOs on corporate social impact issues, and I regularly 
appear in the media on these topics.
    But today, we are talking about the historic exits of 
1,000-plus multinational companies from Russia right after 
Russia invaded Ukraine on, of course, February 24th of this 
year. And we believe we had some influence in helping to spark 
an exodus, if not a stampede, of companies from there.
    We identified the original 12 who exited, and the work that 
I have done previously having to do with voting rights or 
environmental issues or gender parity or racial representation 
or immigration reform, the companies that moved first on Russia 
were not generally the first movers on other social justice 
issues.
    I was surprised by who they were. It was Big Tech, Big Oil, 
and professional services. If we have time later, we could talk 
about that anomaly.
    When I went to talk to the CEOs of each of these companies, 
what they were most concerned about wasn't the recognition of 
being a bold first-mover, but a lot in the media were giving 
attention to the pretenders that were making polite noises but 
actually weren't doing much in terms of pulling out of Russia.
    So I went public in the media, frankly on CNBC and in 
Fortune Magazine. We put the names out of the authentic 
companies that pulled out versus the pretenders, and that was 
akin to Justice Louis Brandeis' admonition of how sunlight is 
the best antiseptic.
    That helped catalyze mass movements of hundreds of 
companies, and we wound up grading them on a system from A to 
F, not just because we are a schoolhouse, but because we wanted 
to get around some of the public relations smokescreen that 
often prevails as to who was truly pulling out. And we can talk 
about that later if there is time.
    One of the biggest takeaways we got was that win the 
companies that pulled out, the shareholders did not suffer. 
These weren't woke CEOs. There was no question about somehow 
with some stakeholders at the advantage of other shareholders, 
is, in fact, companies that pulled out did better than those 
who stayed.
    In terms of that impact, it was enormous. It is a huge 
impact on Russia's economy.
    As I am going into extra innings right now, let me just 
wind down by saying that in working with 45 volunteers with 
great mastery in the languages of the countries we were 
studying, we wound up being the first to puncture Putin's 
propaganda that fooled many in this town. Virtually everybody 
in my field, in academia, macroeconomists of every school, and 
the International Monetary Fund, believes Putin's propaganda, 
that these corporate exits didn't matter.
    They had an enormous impact, and we are the first to reveal 
that Russia's economy was not resurgent but imploding. And if 
we have time later, I can talk to you about how, in fact, it 
did matter, and how doing good is not antithetical to doing 
well. Thank you.
    [The prepared statement of Mr. Sonnenfeld can be found on 
page 70 of the appendix.]
    Chairman Sherman. Thank you. I will now recognize, for 5 
minutes of questioning, the distinguished Chair of the Full 
Committee, Chairwoman Waters.
    Chairwoman Waters. Thank you very much. I would first like 
to say to Mr. Ferry, the chief economist at the Coalition for a 
Prosperous America, I certainly thank you for your testimony. 
You were absolutely descriptive of the harm and the solutions.
    And I am sitting here a bit unnerved by the fact that we 
have not moved more aggressively in dealing with the issues of 
our adversaries that we allow to invest and to seek investments 
here in our country.
    I don't know whether or not you went through all of the 
solutions. If you did not, I would like you to continue, if you 
have more at this time that you would like to share with us 
about solutions.
    Mr. Ferry. Thank you, Madam Chairwoman, for your comments. 
There is more in my written testimony. I think what I would 
highlight here are a couple of things.
    One, on sanctions harmonization, the Department of 
Commerce's Entity List includes over 1,100 Chinese companies 
which are engaged in activities that are either a threat to our 
national security or through taking advantage of oppression in 
the Uyghur region, Xinjiang, a threat to basic human rights.
    On the other hand, the Treasury's list contains a couple 
dozen companies, it is a tiny list, and we need to harmonize 
these sanctions so all arms of the government are operating 
together and taking a resolute, comprehensive position against 
investing in our adversaries, which we are not doing today.
    I would also add that I think these sorts of sanctions and 
Federal guidelines ought to extend not just to publicly listed 
companies in either North America or China, but also private 
investment vehicles, including private equity and venture 
capital.
    I will give you one example. The Biden Administration has 
taken commendable action to restrict the export of 
semiconductors and semiconductor technology to China. The 
entities list has many semiconductor activities on it. 
President Trump took good action to restrict semiconductors 
going to Huawei.
    However, when I looked at the financial records last year, 
the Chinese semiconductor industry invested $8 billion in 
semiconductor investment, 6 times the amount of money that this 
country invested, which was about $1.3 billion.
    A significant portion of that $8 billion of funds going 
into China came from U.S. venture capital firms in California. 
It is a ridiculous situation that venture funds, including some 
funds that invested in my former company, are sitting in Menlo 
Park, California, investing in Chinese high-tech companies, and 
in whatever area of high-tech they are in, it will ultimately 
benefit the Chinese military.
    We need, first of all, more transparency to have visibility 
to these things. Second, we need sanctions and guidelines from 
the Federal Government. Thank you.
    Chairwoman Waters. Wow. Thank you so very much, and, of 
course, I thank our Chair of this subcommittee. This is very 
timely, and as I indicated early on when I made my 1-minute 
presentation, the letter that I sent out to all of these 
companies has not been responded to.
    This hearing absolutely focuses on what we need to do and 
what we must do. The harmonization that you referred to is 
absolutely necessary for us to move forward, and so I thank you 
for being here today.
    And I thank all of our panelists for being here today, and 
I thank our Chair of the subcommittee for leading on this 
issue. I yield back the balance of my time.
    Chairman Sherman. Thank you. I will now recognize Mr. 
Gonzalez.
    Mr. Gonzalez of Ohio. Thank you, Mr. Chairman. And thank 
you to our witnesses for your testimonies and your time.
    Ms. Alexander, I want to start my questions with you. Your 
union certainly has pension assets, right? Are any of those 
assets invested in Chinese VIEs, or in any of the index funds 
that are invested in some of the companies that Mr. Ferry was 
referencing, to your knowledge?
    Ms. Alexander. Thank you for your question. I think much of 
the private equity investments in Chinese companies are through 
some kind of structure that either is VIEs, or mirrors VIEs on 
the private side. I think it is a very important question, and 
disclosure is a way to get at what those investments are.
    Mr. Gonzalez of Ohio. But are your pension assets invested 
in any of those companies, directly or indirectly, to your 
knowledge?
    Ms. Alexander. I don't know the full extent of our pension 
investments. I think we have tried not to be invested directly 
in funds that invest in China.
    Mr. Gonzalez of Ohio. I don't mean to put you on the spot, 
but I have had conversations with other folks who manage money, 
either pension assets, insurance companies, what have you, and 
I have asked that question, and it is an uncomfortable 
question, because the answer is almost certainly yes.
    And by the way, it is yes for the ones that I have asked, I 
assume it is yes for you all, and I think that there is a real 
question here, which is, what should we do about that?
    Frankly, on our side of the aisle, there are sort of two 
opinions. One is, our capital markets are the most open, 
deepest, and most liquid markets in the world, and that is an 
enormous advantage for our country. We should do everything we 
can to protect that, and so you don't want to muck around too 
much with foreign policy things.
    I tend to feel like if you were to poll-test most Americans 
and say, hey, how do you feel about your pension assets being 
invested in companies that are designed to destroy your 
country, they would probably say, no thank you, to that.
    And so, I guess my encouragement would be in absence of 
law, to encourage your union, those managing those assets to be 
more thoughtful in that regard.
    Ms. Chu, I want to switch to you. It's good to see you 
again. It is, I think, your second time here since I have been 
a member. Last Congress, or maybe it was earlier this year, Mr. 
Sherman and I--I lose track of time, he loses track of his 
phone--had the Holding Foreign Companies Accountable Act, in 
which the SEC struck a deal with the Chinese government to 
allow for the auditing to take place in Hong Kong essentially.
    I can't speak for Mr. Sherman, but my goal with that 
legislation was to force Chinese companies to play by the exact 
same rules on the auditing front that every other country and 
every other company in our public markets has to play by.
    With that as a backdrop, how confident are you in the SEC's 
agreement? How confident are you that the Holding Foreign 
Companies Accountable Act will be implemented consistent with 
the intention I just laid out?
    Ms. Chu. Thank you. It is good to see you again, too, and 
it is great to be here, and realizing that we are covering a 
similar topic this year as to last year. Last year, the hearing 
focused a bit more on, I think, end down investment. This year 
we are talking more about outflows, but it is still an 
important topic, and I am just really grateful to be a part of 
it as this conversation is accelerating and more stakeholders 
are becoming involved.
    One of the U.S.'s greatest strengths is its commitment to 
high-quality, reliable disclosures, and financial reports that 
protect investors, that protect stakeholders, and protect 
market participants. China doesn't have that.
    What China has instead is capricious domestic policymaking 
that induces a very volatile market situation, as well as 
nontransparent corporate structures that make it difficult to 
ascertain, as Congressman Sherman had mentioned, what the true 
nature of the underlying assets of security are.
    And as a result, there should be China-specific due 
diligence. Regardless of the results of the PCAOB audits, there 
should be China-specific processes in place that evaluate 
Chinese securities on their own merit, which at present are not 
equivalent to those U.S. securities.
    Mr. Gonzalez of Ohio. I only have 10 seconds. I would love 
to know more specifically about what you have in mind. With 
that, I will yield back.
    Chairman Sherman. Thank you. At this point, I will 
recognize Mr. Scott for his questions. I do have questions, 
don't worry, but Mr. Scott will come first.
    Mr. Scott. No problem. Thank you very much.
    First of all, let me just say, I agree first with Chairlady 
Waters. This is an extraordinarily important hearing, and 
because of this fact, China is now the second-largest economic 
system in the world, next to ours.
    And although we have some very starkly different foreign 
policy and political differences with China, as the whole world 
knows, this one fact is true: China cannot be ignored as a 
global power in the global economy. And China's growth and 
substantial share of the global economy means that we have to 
carefully consider China's role in our own financial system at 
the top of the line, the United States. Investment companies 
and pension funds have a fiduciary duty, best interest, to 
their investors. They have to act prudently in order to 
minimize the risk of large losses.
    Ms. Chu, let me ask you this question. It is sort of a 
three-point question, but it all comes together. Are 
investments in Chinese companies inherently more risky, and 
does China's OPEC regulatory regime make them more risky? And 
finally, would reducing investments in Chinese-owned companies 
improve pension plans' performance and stability? Ms. Chu?
    Ms. Chu. Thank you. Chinese companies trading, whether 
domestically or listed on overseas exchanges, are inherently 
more risky for a number of reasons, some of which my fellow 
panelists have spoken on, but one of the reasons being variable 
interest entities (VIEs). Variable interest entities are a way 
in which Chinese companies can circumvent certain domestic laws 
but also enter U.S. markets using different jurisdictions. And 
the way that the conversation has played out over the past 
couple of months, the U.S. has been wondering whether China was 
planning to actually clamp down on the use of VIEs.
    They are technically legal in China, and so there is this 
question, is this going to be a problem, or is the problem 
going to resolve itself?
    But last December, the Chinese equivalent of our SEC 
released a rule saying that VIEs are actually okay. There are 
certain policies in place, but business as usual.
    And this type of event goes to show how much of Chinese 
financial policymaking is, again, capricious and unpredictable. 
A lot of times, it is led by domestic priorities rather than 
market reasons, and there is a lot that goes into China's 
policymaking that is not necessarily profit-driven. And because 
of that, Chinese companies and Chinese securities are 
inherently more risky.
    And really quickly, to your last point about pension funds, 
I will say that the Tennessee Consolidated Retirement System 
(TCRS), might be the only pension fund in the United States 
that has little to no exposure to China or Russia, and that is 
because they invest in country-specific ETFs and have used a 
democracy weighting system.
    And they still outperform many other pension funds. So, it 
is possible. It just matters whether or not an administrator is 
willing to take that stand and also willing to make that shift 
for all of the constituents.
    Mr. Scott. Excellent. And I agree with you too, and I think 
your remarks were right on target.
    And now, Mr. Ferry, let me go to you. In your written 
testimony, you agree that there are substantial China-specific 
material risks to our investors relating to national security. 
How is this a threat to our national security? That, I believe, 
is on the top of the minds of all of us.
    Mr. Ferry. Thank you, Congressman. Yes, there absolutely 
are risks to our national security from some of the Chinese 
companies that are funded by American investors. As I said, the 
civil-military crossover is widespread. It spreads across many 
industries.
    I could give you an example of the China State Shipbuilding 
Corporation (CSSC), a Chinese shipbuilding company which is 
building military ships. China, as you may know, has the 
world's largest navy. The United States is now number two--you 
don't often hear that about the military sector, where the 
United States is number two, but the Navy is an area where it 
is.
    CSSC takes in investment funds through these indexes and 
international exchange-traded funds, and CSSC is building 
ships, it is building ports, and it is building other naval 
equipment to enable the Chinese navy to grow. And we are 
helping to fund that, and I think that is a situation that 
should change.
    Mr. Scott. And, Mr. Chairman, I would ask for just a couple 
more seconds because I want to ask you, Mr. Ferry, because I 
think the whole nation wants to know, with all of this missile 
activity, with what China is doing in the arena--
    Chairman Sherman. Mr. Scott, you are already a minute over, 
so I will ask that the answer be for the record. We will decide 
later whether we are doing a second round, but unless the 
witness feels they can answer in just 10 or 15 seconds--
    Mr. Ferry. Can you summarize your question? The missile 
activity over Taiwan is absolutely a threat.
    Mr. Scott. I am just saying that is what is busting on the 
news everywhere. I think it is appropriate for us to get some 
kind of answer from all of you.
    Chairman Sherman. Thank you, Mr. Scott. Your time has 
unfortunately expired.
    Mr. Scott. Sorry.
    Chairman Sherman. I will now recognize myself for 5 
minutes. There are a few comments I want to make first. First, 
it is this Congress and this committee that put the pressure 
on, passed the law that is getting the PCAOB access to the 
audit work papers.
    Right now, they are in Hong Kong to see whether this 
agreement is actually going to be implemented, and if it is 
not, then our law will require that many of these Chinese 
companies need to be delisted.
    The second is, and I think Ms. Chu pointed this out, that 
the VIE structure is designed to evade Chinese laws, or avoid 
Chinese laws, however you phrase it, but it puts our investors 
in a position where they think they are buying Alibaba, a big 
Chinese company, and instead, they have no shareholder rights, 
except in Alibaba Cayman Islands, which raises the issue of 
whether we should allow a company to sell stock in our country 
calling themselves Alibaba, when they are really Alibaba Cayman 
Islands, not the same thing as the big Chinese company.
    And we have to look and see whether it is appropriate for 
low-cost funds and index funds to be investing in companies 
that either have fled American markets to avoid the PCAOB, or 
employed a VIE structure, because when you have no money to 
investigate what you are investing in, you are just doing it on 
the basis of an index. And those are risks to which you 
probably shouldn't subject American investors.
    And in particular, Alibaba is one of the biggest companies 
in the world. If you want to invest in the big countries of the 
world, invest in Alibaba. But Alibaba Cayman Islands is not one 
of the biggest companies in the world, and so you don't 
actually meet the qualifications for the index.
    Ms. Chu, I would like you to comment on the idea of whether 
these low-cost, paint-by-the-numbers index funds should be 
allowed to invest in VIEs that are not operating companies, but 
rather a company in the Cayman Islands, that has a relationship 
with a company in China, that then has a relationship with 
Alibaba or another big Chinese company.
    Ms. Chu. Thank you. And, no, I don't think that this should 
be an option for U.S. investors, least of all because of 
investor protections, but also because of the possibility that 
some of these companies are engaged in activities that are 
contrary to U.S. national interests, without the knowledge of, 
again, the investor.
    The problem with index funds is that they are beholden to 
profit. The index funds, and the index providers specifically, 
operate using a set of technical and financial criteria, so 
criteria like market cap or liquidity or size, when they 
evaluate which companies or securities to add into an index or 
which ones to remove.
    For example, Russian securities were all removed from MSCI, 
FTSE Russell, S&P, Dow Jones, all of these indexes in early 
March of this year. But they weren't removed because of ethical 
concerns or because of U.S. sanctions. They were removed 
because they were virtually worthless.
    And there are already policies--
    Chairman Sherman. I do want to move on with my question.
    Professor Sonnenfeld, should index funds be investing in 
companies that were listed on American exchanges and then 
delisted themselves, or were delisted, because they wouldn't 
allow access of the PCAOB to their audit work papers?
    Mr. Sonnenfeld. I share the spirit and the content of my 
fellow panelists. I do think that there should be greater 
transparency, and that even sophisticated investors are 
representing a lot of individual innocent people's money--
    Chairman Sherman. I am going to try to sneak in one more 
question. In November of 2020, the SEC required that in public 
offerings, you have to disclose the unique risks that investors 
face investing in China, the VIE structure, the rule of law 
questions.
    Should we also require that these same risk factors be 
disclosed? And this is required by one of the pieces of 
legislation under consideration today, that these same risk 
factors be disclosed to those investing in private placements.
    Mr. Sonnenfeld. Yes, I think they should be. I will say in 
the case of Alibaba Cayman, I actually read the 500-page 
registration papers, not in preparation for this, but when it 
happened, I thought that the volume was misleading itself.
    It, in fact, allowed for Jack Ma, the then-CEO, to be 
emperor for life with the exception that only the Chinese 
government could remove him. He had founder shares that nobody 
in the U.S., that I know of, who invested in the company 
realized he had, but it was just buried in so much stuff.
    Sometimes, I will say, Mr. Chairman, we have disclosure, 
and it is still not transparent. It was buried in the fine 
print.
    Chairman Sherman. Thank you. My time has expired, and I 
will now turn to the gentleman from Connecticut, Mr. Himes, who 
is also the Chair of our Subcommittee on National Security, 
International Development and Monetary Policy, a new 
subcommittee that also deals with some of the national security 
issues that we are confronting here today in this subcommittee. 
Mr. Himes?
    Mr. Himes. Thank you, Mr. Sherman, and I am glad that the 
titles don't get charged against my time here. And thank you to 
the witnesses who are with us today.
    I have a question that I am going to direct, not to 
Professor Sonnenfeld, but to Ms. Chu and Mr. Ferry, and it is a 
China capital markets-related question. It is not controversial 
to me that China shouldn't have any advantage over other 
international issuers with respect to disclosure in PCAOB, but 
we are spending a lot of time talking about China and Russia, 
two very different countries with very, very different 
situations from a capital markets standpoint.
    We have almost no capital market interaction with Russia. 
We have very little trade with Russia. That was true when 
Russia was the Soviet Union.
    We have deep, deep, deep ties financially with China, $125 
billion a year, roughly, of foreign-directed investment into 
China, with $38 billion coming this way. China owns $1 trillion 
of United States Treasury debt.
    The situation is one akin to the ones that the Germans find 
themselves in with respect to Russian energy, of deep 
entanglement.
    What I am not hearing in today's testimony and I will just 
ask you--I do have one question for Professor Sonnenfeld 
related to Russia, so I will ask for quick answers--what should 
be our strategy with respect to these financial and capital 
markets entanglements with China? Should we be looking for 
less, with what that might imply for growth? Should we be 
looking for more, because entanglement will also create 
commercial interests against the possibility of kinetic 
antagonism?
    Just give me your thoughts on what our overarching 
principle should be with respect to financial and capital 
markets entanglement with China?
    Ms. Chu. Thank you. Quickly, I want to touch on your last 
point, which is the concept of peace through trade, democracy 
through trade. I think it is a concept that a lot of 
Administrations in the past have held up, and we have seen was 
perhaps not as effective as we might have hoped.
    And with the case of China, yes, perhaps trade and further 
entanglement will endear diplomatic relations. At the same 
time, trade goes both ways. So while the U.S. may be able to 
export values such as freedom of speech, or civil liberties, to 
attempt to export these to China, China is also and has also 
exported concepts like censorship, for example, authoritarian 
values to other countries.
    Mr. Himes. Mr. Ferry?
    Mr. Ferry. Congressman, I believe we ought to decouple this 
economy from China, not immediately, but over time, and I 
believe that will benefit the U.S. economy.
    You say there are commercial gains on both sides. Right 
now, we are importing from China $600 billion worth of goods 
each year and exporting around $150 billion worth of goods. If 
we can reduce that level of imports and redirect that demand 
towards American production, you will see the American economy 
grow, and you will see employment, good-paying jobs grow in 
this country.
    On the capital market side, I think the same thing will 
follow. We do not need them to buy $1 trillion worth of our 
Treasury debt. And they are buying it partly in order to keep 
the dollar high so they can continue to keep Chinese people 
employed, because the one thing President Xi fears more than 
anything else is a revolt and a revolution of the Chinese 
people against the oppressive system he has put in place.
    Instead, our capital should be funding investment in U.S. 
industries and in investing in friendly nations. There are the 
iPath nations, India, there are plenty of friendly nations that 
we could invest in as a matter of foreign direct investment, to 
grow their economies, to grow trade in a balanced fashion, and 
regrow our own economy.
    As far as capital markets go, I always fall back on the 
quote of Paul Volcker, who was Chair of the Fed many years ago, 
and I believe the best Chair the Federal Reserve has ever had. 
He said, ``Every time I have a meeting with financial 
professionals, they tell me that free, open capital markets are 
making the U.S. economy more efficient, and I ask them for an 
example, and in 30 years, they have never been able to give me 
one example.''
    Mr. Himes. Mr. Ferry, I have a quick question to you. The 
Congress, on a bipartisan basis, rejected the Trans-Pacific 
Partnership (TPP) trade deal. Very, very quickly, should the 
Congress reopen the discussion of something that looks like the 
TPP? This is for Mr. Ferry, then I am going to Professor 
Sonnenfeld.
    Mr. Ferry. I absolutely do not believe that free trade 
agreements benefit the United States.
    Mr. Himes. Okay. Thank you.
    Professor Sonnenfeld, the sanctions that have been applied 
to Russia, big holds obviously associated with Chinese 
purchases of Russian energy, et cetera, and in the 20 seconds I 
have remaining, what more should the West collectively, the 
United States in particular, be doing to isolate the Russian 
economy?
    Mr. Sonnenfeld. The energy deals aren't so bad, that China 
and India can't buy the Russian gas the way Putin said, even 
though most of the world was fooled by that, but most Russian 
gas goes through pipelines. It is natural gas. It is in the 
form of vapors, and he doesn't have pipelines into Asia. The 
liquid natural gas that we can sell them and are selling them--
we now supply the EU with more gas than they ever bought from 
Russia. Russia has fallen, just as the war broke out, from 46 
percent down to 9 percent of gas on oil. It is not such a big 
problem either because they are such tough bargainers in India 
and in China, that they are extracting a $36-barrel discount, 
on top of the fact that Russia is the least-efficient producer 
in OPEC. It costs the Saudis $22 a barrel. [inaudible] They are 
not making money. But there are things they can do.
    Chairman Sherman. Thank you. The time of the gentleman--
    Mr. Himes. I thank the chairman for his leniency.
    Chairman Sherman. I now recognize the gentleman from 
Illinois, Mr. Foster, who is also the Chair of our Task Force 
on Artificial Intelligence, for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman. This is for Mr. Ferry 
and Professor Sonnenfeld. There are two general classes of 
disclosures for cross-border investment flows. There are 
disclosures to regulators and disclosures to the public. Can 
you say something about the relative merits of either one in 
terms of accomplishing what we want to accomplish here, 
Professor Sonnenfeld?
    Mr. Sonnenfeld. I don't think there should be differences. 
I think disclosures to the public and disclosures to the 
regulators should be one and the same. We don't need to look 
very far from FTX to see some awfully sophisticated people who 
got fooled and have lost a lot of money when they thought they 
understood what they didn't. We need to have, I think, a more 
equal playing ground on disclosures across sectors.
    Mr. Foster. Mr. Ferry?
    Mr. Ferry. I would echo what--I agree 100 percent with my 
what my Yale colleague expressed, and I guess what I would add 
is that I spent an earlier part of my life reading 10-Qs and 
10-Ks. Disclosures to the public are a great benefit to 
investors. And I would just say if you think of Bernie Madoff 
and the way in which he evaded disclosure to the public and got 
billions of dollars of funds, China is full of literally 
hundreds of people who are just like that, using 
nontransparency to attract millions and billions of dollars. 
And I would hate for that to be American money.
    Mr. Foster. What sort of efficiency hit would the global 
economy take from a just radical transparency requirement for 
all cross-border investment flows? You have to know the 
beneficial owner on each end and you have to know where the 
money is actually going. There is an obvious paperwork cost of 
that, which I guess could be roughly quantified, but aside from 
that, what would be the downside of that?
    Mr. Ferry. That is--
    Mr. Foster. Anyone who wants to say, even if you don't 
agree with it, what would be the arguments you anticipate 
against a radical transparency regime?
    Mr. Ferry. Efficiency in quotes always benefits when you 
strip away regulations. If in the Democratic Republic of the 
Congo, there are 10-year-olds mining cobalt, boys and girls, 
would you call it more efficient because the cobalt is cheaper 
than if we mined it in a country that respected laws and 
regulations? So, I think efficiency is an overused and 
overrated word.
    Mr. Foster. Ms. Chu, you mentioned something called 
democracy waiting, which I found fascinating. How exactly does 
that work? Do you just trace back where all of the investment 
flow is starting and originating, and then find some way of 
saying, okay, this much is coming from that country, it has a 
democracy waiting of .5?
    Is there a general mechanism here, where you could set up 
not only democracy waiting, but national security waiting or 
religious freedom waiting or abortion rights waiting, or 
whatever you want, with enough transparency of where the money 
was coming and going?
    Ms. Chu. Thank you. In the case of TCRS, I can't remember 
exactly what their process is. I think they use some sort of 
annual report that comes out on democracy around the world. 
Although there are so many great nonprofits and there are 
watchdog groups that put out reports, and I think annual 
research about democracy, freedom of speech, freedom of 
religion and all of these other topics, environmental, so ESG 
plus essentially, that one could use to formulate their own 
methodology, their own waiting matrix.
    Mr. Foster. Okay. But the other part of the problem is 
actually seeing the flow. Waiting to assign this mine in this 
country from how good and accurate it is, and then there is the 
tracing of the flow.
    Is the rest of the thing a potentially solvable problem, 
and then let third parties estimate how to apply those waits to 
the final product that someone may want to base their 
investment decision on?
    Ms. Chu. In this case, I think the strategy involves using 
pre-existing exchange-traded funds that are attracting country-
specific indexes. And there isn't additional waiting or 
analyses on the part of the fund administrator. With that said, 
I do know that there are funds out there--there is one that 
uses something they call freedom waiting, which are proprietary 
methods that I am sure could be expanded upon by other index 
providers, larger ones as well, that I think are of value and I 
am hopeful will catch on.
    Mr. Foster. Ms. Alexander, can you say anything about the 
differences in different countries and how useful they are in 
tracking down all of these issues?
    What are the limits of what the U.S. can do unilaterally 
versus are there gaping holes where some countries just are not 
helping out with the transparency we need here?
    Ms. Alexander. Thank you for your question. I think there 
is a lot more information that is publicly available in other 
countries that we don't have a habit of disclosing in this 
country. And I do think disclosure and transparency is a way of 
holding capital accountable for what it ends up getting 
invested in, the patterns or the structures of transparency on 
who owns companies, what the investments are in different 
countries is pretty complex, but--
    Chairman Sherman. I am going to have to interrupt at this 
point. The time of the gentleman has expired.
    I'll move onto Mr. Vargas, who is there on our screen, and 
is recognized for 5 minutes.
    Mr. Vargas. Thank you very much, Mr. Chairman. And I thank 
the ranking member, of course, and all of our witnesses today.
    Mr. Sonnenfeld, you were saying that there were gaps in our 
sanctions on Russia, and then you started to say that we could 
do something about it. Then, you were truncated about that 
point, and you didn't tell us what those were. Why don't you go 
ahead and tell us what those were?
    Mr. Sonnenfeld. Thank you, Mr. Vargas. I did want to more 
completely answer Congressman Himes, and I thank you, 
Congressman Vargas, for giving [inaudible] Oligarchs that it 
could have been better addressed than the families of oligarchs 
and top public officials, and there are some sanctions groups 
that have some great legislation on this, from the McFaul group 
out of Stanford, and from the Kyiv School of Economics, but in 
particular, the major U.S. airlines are suffering badly right 
now, and it is an area that hasn't gotten much attention.
    American passengers are filling the flights of American 
departing planes that are flying on Qatar Air, on Etihad, on 
Emirates Air, on--not just Middle Eastern carriers, Air Serbia, 
Air India that are making the most-profitable U.S. airline 
routes, the most-profitable paired routes so unprofitable that 
they are canceling them, flying from San Francisco to New 
Delhi, flying from Newark to New Delhi, JFK to New Delhi or to 
the Philippines, Dallas to Seoul, these are flights that are 
being canceled now by American, by United, and by others that 
used to be the most-profitable.
    And who's filling them? Americans. Why? Because they are 
flying out of U.S. departure airports. They are flying over 
Russia. Our airlines can't and shouldn't do that, but we are 
allowing the non-U.S. carriers flying out of the U.S. that 
nobody questions this, that is--we are also paying, by the way, 
millions of dollars of overage fees that go to Russia because 
of the way air traffic rules work. We pay the money to fly over 
them that Americans are basically paying for that, and we are 
hurting our own airlines. So, thank you, sir. That is a major 
issue.
    And the third one has to do with parts. There is something 
going on that has not been publicly discussed until this 
moment. Boeing is living by sanctions against using Russian 
titanium. In fact, they had a major joint venture in Russia. 
They discontinued it. I am sorry to say that I believe British 
Airways has gone in and taken over what had been Boeing's 
interest there. And we have other parts leakages issues, so 
that Aeroflot, an F7 domestic carrier, had basically stopped in 
March. They are back up in the air right now because somebody 
is getting aviation parts that are being smuggled in and leaked 
in. I just think that some in Europe aren't living by the same 
rules as some in the U.S. when it comes to aviation. And we 
have foreign carriers leaving U.S. airports that aren't being 
held to the same standards as U.S. carriers.
    Mr. Vargas. Okay. I do want to follow up with one question, 
You published a formal analysis of the stock price performance 
of publicly traded companies, which had announced formal plans 
to suspend commercial activity in Russia compared to their 
peers, which continued to do business there following the 
Russian invasion of Ukraine.
    In your findings, you observed that firms pulling out 
experienced a 4-percent market capitalization increase, whereas 
firms that continued to operate in Russia saw an average of a 
5.5-percent decline.
    Is that still the case today, do you know?
    Mr. Sonnenfeld. Yes. We have a team studying that right 
now, Congressman. Thank you very much for asking about that.
    If you would take a look independent of the country where 
it is domiciled, independent of the size of the company, 
independent of the industry, you could look at an industry 
sector like energy. It is not all, ``a rising tide raises all 
boats.'' Energy total suffers where BP and others are soaring. 
Exxon and Shell, they each wrote down billions of dollars, but 
they wound up having a 13 to 20 percent surge in their stock 
price, having reduced financial risk, operational risk, and 
reputational risk.
    So, they paid off. And in every industry, you find the same 
thing, whether it is retail and consumer goods or 
pharmaceuticals, the companies that stayed there are doing 
worse than the companies that pulled out. Even the public and 
private companies, we have looked at pricing, the debt 
offerings of private companies--it is a higher risk I will say.
    Mr. Vargas. My time is about up. I just wanted to point out 
that corporate social responsibility, in some cases, really 
does pay off. I appreciate it.
    I wish you the worst of luck on Saturday. I hope Yale gets 
crushed.
    Mr. Sonnenfeld. Thank you, sir. It is an away game. We are 
worried.
    Mr. Vargas. I will be there with my daughter. So, I am 
looking forward to it.
    Chairman Sherman. Thank you. The time of the gentleman has 
expired, although I agree with him on the game, and I now 
recognize the gentleman from Illinois, Mr. Casten, the Vice 
Chair of this subcommittee.
    Mr. Casten. My contribution of comity on this panel is 
going to a small Division 3 college that cannot compete in any 
sports against the rest of you.
    Thank you, Mr. Chairman. And thank you to our witnesses.
    Ms. Chu, I want to follow up with you, and just follow up 
on the exchange you had with Mr. Gonzalez. He had chatted with 
you about the Holding Foreign Companies Accountable Act, in 
which, if the PCAOB is not allowed to review these auditors, 
these companies are going to be delisted within 3 years of 
enactment, which is about a year from now.
    Just really quickly, given how much time you have spent in 
this space, are you optimistic as we sit here today that we are 
going to come to some agreement with the Chinese regulators to 
get through that, or are these 200-some listed firms going to 
be delisted by the end of the year? What is your view of where 
this sits right now?
    Ms. Chu. Thank you. I think it is possible to come to an 
agreement, but enforcement is a whole other issue. And in 
addition, disclosure is a problem, true disclosure, and also 
the fact that Chinese companies have found so many loopholes, 
whether through regulations or through corporate structures to 
navigate U.S. regulations on this front. I think it is possible 
that it will pass, and I am hopeful, because that sets a 
wonderful precedent. But I don't think that means the challenge 
is over.
    Mr. Casten. Just from a capital markets perspective, give 
me the outer bounds here. If these 200-ish companies are 
delisted, what kind of volumes are we talking about on U.S. 
capital markets, in terms of dollars? Any sense of what that 
is?
    Ms. Chu. I think I have to defer to Mr. Ferry on this.
    Mr. Casten. Mr. Ferry?
    Mr. Ferry. I'm sorry. That is a good question. I don't have 
at my fingertips the volume of trading or the volume of capital 
involved in these 200 companies. I do agree with Ms. Chu's 
point of view that an agreement is possible. Enforcement of the 
agreement is going to be very difficult, given where the 
Chinese economy is with deep, deep problems with debt. Their 
interest is in keeping our investors' pockets open to help prop 
up their economy.
    Mr. Casten. Okay. I am not trying to get precise numbers, 
but I am asking because we have also seen the rise in this 
exempt offerings market, which, of course, would be totally 
outside of these rules, and not subject to SEC compliance.
    And Ms. Chu, Mr. Ferry, any of you who have any other 
thoughts on this, are you satisfied if indeed this Act were to 
go into force, if indeed whatever this quantum of money is, 
does that actually get pulled out, or should we be concerned 
that we are just going to create a venue for this money to move 
over to the exempt offerings market, because I think the latest 
number I was able to find was $2.7 trillion, just in 2019, 
raised on those markets, which I think would be totally outside 
of this agreement; is that right?
    Mr. Ferry. I think so, but I haven't studied that issue in 
detail. And if your point is that the money will find a way to 
be domiciled in the Cayman Islands and still invested in China, 
all of these leakages are possible because capital is fungible, 
but we have to go step by step and protect our investors each 
step of the way, and then plug the holes just like the 
proverbial woman and the Dutch dike.
    Mr. Casten. Any suggestions on what Congress might do to 
plug those holes?
    Mr. Ferry. The first thing is to enforce the Holding 
Foreign Companies Accountable Act. And the next thing is to 
move to sanctions harmonization to require all arms of the 
Federal Government to harmonize, preferably with the Department 
of Commerce's Entity List, which lists 1,100 Chinese companies 
as companies in which U.S. investors should not invest.
    Mr. Casten. With the time I have left, I want to move to 
Professor Sonnenfeld, and just to pick up on Mr. Vargas' 
question a little bit, this observation in your research that 
there is a declining market cap for companies that have stayed 
in Russia, obviously, they reversed the other way.
    I think--and if I am putting words in your mouth, correct 
me--you are saying that it is our sanctions regime that has, to 
some degree, contributed to that?
    Mr. Sonnenfeld. It is completely independent, but 
consistent with the sanctions regime, when we have seen 
disappointments in economic blockades in Cuba or North Korea or 
Iran, it is because, in fact, we didn't have the sectors 
working together. But these are independent decisions that have 
not been, for the most part, in finance and some other areas 
that were driven by sanctions. But for the most part, these 
were individual decisions.
    As we saw with Libya, Chile, Yugoslavia, Ceausescu in 
Romania, and Erich Honecker in East Germany, we saw a profound 
takedown of tyrants happen because of private-sector decisions 
that matched the public-sector decisions. That is what makes 
blockades work. But in South Africa, for example, there were 
sanctions passed by our government--I think by a 77-22 vote 
that Senator McConnell actually led the override of President 
Reagan's veto on it. Still, that wasn't enough. It took 200 
companies to voluntarily pull out. That was the high watermark 
then, and that was independent of the sanctions; Coke, IBM, and 
GM led that. And now, we have never seen anything like this in 
world history, to have 1,200 companies voluntarily pull out, 
either through enlightened self-interest, ethics or whatever 
reason, it was--
    Chairman Sherman. The time of the gentleman has expired. I 
thank for your answer.
    I would like to thank our witnesses for their testimony. 
And I thank Mr. Gonzalez for representing his party well here.
    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 now adjourned.
    [Whereupon, at 3:24 p.m., the hearing was adjourned.]

                            A P P E N D I X



                           November 15, 2022

	
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