Compel Chinese companies listed in US to disclose party links, Congress urged

Owen Churchill

Chinese companies publicly listed in the United States should be forced to disclose any financial or political ties to Beijing, a US congressional body recommended on Thursday.

The US-China Economic and Security Review Commission (USCC) called on Congress to enact legislation requiring Chinese companies to include details of any government subsidies, loans or grants they receive, the conditions under which that support is provided and whether the company hosts a Chinese Communist Party committee.

In its annual report, the USCC said Chinese companies should also be prohibited from issuing securities on US stock exchanges if regulators were denied “timely access” to audit papers relating to the firms’ operations in China and if the companies used corporate structures to circumvent the country’s restrictions on foreign direct investment.

So-called variable interest entity structures are used by some Chinese companies to allow them to list in the US via an affiliated foreign company that operates through a contract rather than by direct ownership.

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“The lack of disclosure by and oversight of US-listed Chinese companies opens the door to adverse activities, such as insider trading, accounting fraud, and corporate governance concerns that could put US investors, including pension funds, at risk,” the report said.

An influential body in the field of US policy towards China, the USCC was set up by Congress two decades ago to advise lawmakers on the national security implications of the economic relationship between Washington and Beijing.

Unlike last year, when commission members were denied visas to visit China, research staff were able to make official visits to the country this year to meet government officials, US diplomats, business representatives and experts.

The commission also heard from about 80 expert witnesses in public hearings in the US and received classified briefings from US government officials.

The report came during a particularly violent week in Hong Kong, where anti-government protesters are seeking to bring the financial hub to a standstill to force the city’s leaders to meet their demands. The USCC recommended that the city’s special economic status – enshrined under the US-Hong Kong Policy Act – be suspended should Beijing deploy its military to quell the unrest.

Among the report’s other recommendations, the USCC called for legislation requiring the US federal drug agency to investigate and certify that Chinese pharmaceutical industry regulations met the same standards as those in the US, to protect American users of Chinese-sourced medication.

US reliance on life-saving drugs containing ingredients sourced in China was growing, the report said, despite what it called “serious deficiencies in health and safety standards” in the country’s pharmaceutical sector and “inconsistent and ineffective regulation by the Chinese government”.

The report also issued warnings about China’s military ambitions, saying Beijing was growing and diversifying its nuclear arsenal, expanding its military presence in the Indo-Pacific region and pursuing a “military-civil fusion” strategy to gain advantage in critical emerging technologies – a strategy that may be benefiting from partnerships between US and Chinese tech firms.

Strategic ties between Beijing and Moscow were also deepening, the report said, with both powers finding consensus in their objection to the existing international order and the interests it promote, including “human rights, democracy and a rules-based economic system”.

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Both countries were emboldened to take more aggressive action in their respective regions due to their perception that the US and its allies were “in decline”, it said.

On China’s economy, the congressional body said the trade war with Washington had exacerbated a slowdown throughout 2019, pushing growth to its lowest level in almost three decades.

On Wednesday, the National Institution for Finance and Development in Beijing forecast that China’s economic growth rate would fall to 5.8 per cent next year, becoming the first government-linked body to issue a sub-6 per cent growth rate outlook for 2020.

Faced with the slowdown, moderate stimulus measures deployed by the Chinese government, such as infrastructure spending and tax cuts for businesses, had heralded a “modest recovery” in the first half of the year, but had failed to stop a broader economic slowdown, the USCC report said.

The findings came as both governments seek to sign the first in a series of incremental deals to bring the 16-month trade war to a close.

In Washington late on Thursday, White House chief economic adviser Larry Kudlow said both sides were “coming down to the short strokes” of the agreement.

Kudlow, consistently one of the administration’s most optimistic voices on progress in the trade talks, said that US President Donald Trump “likes what he sees” but was yet to commit to the deal.

The USCC’s report, which was finalised on October 4 – before negotiators aired the prospect of a “phase one” deal – said that China viewed Washington’s pursuit of structural change in its economic model as “an attack on its national development”.

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